If you're in debt, or if you get divorced, your creditors or your former spouse may want a share of your 401(k) plan assets. Their rights, and yours, are spelled out in the law.
If you’re in debt, your creditors—businesses, family, or governments—may try to collect what you owe. But whether or not they will be able to force you to liquidate your 401(k) assets to meet your obligations depends on who they are, and the legal routes they take.
It’s generally true that your 401(k) is safe from commercial and professional claims—such as car repair bills or legal fees—whether you’re sued in either federal or state court. That’s because the federal ERISA law, which governs all 401(k) plans and supersedes state laws governing retirement plans, protects your money from these creditors. You won’t be ordered to withdraw from your plan to pay now, nor can your account be frozen until you pay the debts.
For the most part, you cannot be forced to use your 401(k) money to pay state and local income, property, or other taxes. However, if you owe child support, alimony, or federal income taxes, a court may order you to withdraw money from your 401(k) to pay those debts. Because state and federal laws differ, you may want to seek legal advice to be sure which will apply.
If you change jobs or retire and want to be sure that protection continues, you may want to consider leaving your assets in your former employer’s plan or rolling it into an individual retirement account (IRA). Cash you withdraw is no longer safe from claims against you, though IRA assets are.
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