The Retirement Plan Shield
If you owe any child support or taxes to the Internal Revenue Service, it will open up your accounts to lawsuits. Domestic relations lawsuits will actually lift IRA protections anywhere you reside within the United States.
Also, if you owe taxes to the IRS, your retirement assets may be in danger, just like any other asset that can be seized from you to settle the unpaid debt.
Note that the federal government will apply the same rules associated with minimum withdrawal rules in case of a lawsuit and will actually charge a 10 percent early withdrawal rate if you’re planning to extract money as a reaction to your lawsuit.
If a private creditor happens to sue you for unpaid debt, remember that retirement accounts are usually protected. The Employee Retirement Income Security Act (ERISA) relates to federal protection of 401(k) and other employer-sponsored retirement accounts from creditors.
The federal government ensures the safety of these retirement accounts even in the case of a lawsuit. Up to $1 million of a defendant’s IRA will be protected under the Bankruptcy Abuse Prevention Act of 2005.
However, six years ago, in June, the U.S. Supreme Court decided that inherited IRAs will no longer be sheltered if the inheritor files for bankruptcy—except for IRA being inherited from a spouse.