Non-ERISA plans aren't always protected. Depending on the state you live in, your IRA and other non-ERISA plans may or may not be protected from creditors. Some states, for example, protect IRAs in almost all cases, while others only offer limited protection. One of your options is to file for bankruptcy and take advantage of the IRA protections that this process entails.
There are many other types of exemptions to protect you from lawsuits, in addition to the protection of IRA creditors in each state. In addition, other methods of asset protection include having appropriate insurance coverage and taking advantage of real estate protection laws. When an IRA beneficiary files for bankruptcy, protection against creditor claims is no longer provided, Forbes explains. Outside of bankruptcy, state laws determine whether money in an unqualified account is protected from creditors.
Even if you have accumulated millions of dollars in your retirement account and owe money or have filed for bankruptcy, creditors cannot access funds from these plans that meet the requirements of ERISA. Below, you'll see the various exemptions for creditors per IRA judgment by state (at the time of writing). Investments held in an IRA can include a range of financial products including stocks, bonds, exchange-traded funds (ETFs) and mutual funds. However, most IRA depositories won't tell you this because they don't earn fees for such transactions.
During retirement, withdrawals from a traditional IRA are taxable at their ordinary income tax rate, while withdrawals from a Roth IRA are taxable. A trust established for a child or other beneficiary other than their spouse can place IRA assets in that trust and protect those assets from creditors. However, there are some cases where money in an account that meets the ERISA requirements may not be protected from creditors. Whether you have a traditional IRA, a Roth IRA, or both, you should keep in mind that creditor protection from an IRA varies by state.