A physician in Los Angeles rolls a $2.4 million 401(k) into a traditional IRA after leaving a hospital system. Two years later, a malpractice plaintiff wins a judgment and moves to garnish the account. Under California law, a court can order part of that IRA turned over if it decides the balance exceeds what the doctor “reasonably needs” in retirement. Had the money stayed inside the hospital’s 401(k), federal law would have blocked the creditor entirely, no matter the size of the judgment.
That gap between workplace-plan protection and IRA protection catches millions of Americans off guard. Each year, more than $600 billion flows out of employer-sponsored retirement plans and into IRAs, according to Investment Company Institute estimates. Most of those rollovers happen for a practical reason: people change jobs and want their savings consolidated. What rarely comes up during the paperwork is that the move trades one of the strongest creditor shields in federal law for a patchwork of state rules that may leave a large portion of the balance exposed.
How ERISA’s anti-alienation rule works
Section 1056(d)(1) of the Employee Retirement Income Security Act contains a single, blunt sentence: benefits in a covered plan “may not be assigned or alienated.” That language functions as a near-absolute bar. Private creditors, divorce claimants (outside a qualified domestic relations order), and even victims of fraud by the account holder are all blocked from reaching assets inside an ERISA-governed workplace plan.
The Supreme Court tested that bar in Guidry v. Sheet Metal Workers National Pension Fund, 493 U.S. 365 (1990). A union official had embezzled from his own union, and the union asked the court to impose a constructive trust over his pension as a remedy. The justices refused. ERISA’s anti-alienation provision, they held, blocked even equitable claims, regardless of how sympathetic the creditor or how egregious the participant’s conduct. Congress wanted plan benefits kept out of creditors’ hands, full stop.
Two narrow exceptions exist. The IRS can levy an ERISA plan to collect unpaid federal taxes, and courts can enforce criminal restitution orders under the Mandatory Victims Restitution Act. Outside those carve-outs, the shield holds.
That shield, however, is tethered to the plan’s status under ERISA Title I. Department of Labor regulations, specifically 29 C.F.R. § 2510.3-2(d), exclude most IRAs from the definition of an “employee pension benefit plan” when the employer makes no contributions and the participant controls investments. The moment a worker rolls 401(k) money into a personal IRA, the account typically falls outside ERISA Title I, and the anti-alienation rule no longer applies.
What bankruptcy law still protects
Congress built a separate, nationwide safety net for retirement assets inside the Bankruptcy Code. Under 11 U.S.C. § 522(d)(12) and (n), a debtor who files for bankruptcy can exempt “retirement funds” held in tax-qualified accounts. For traditional and Roth IRAs funded by the owner’s own contributions, the exemption is capped at a dollar figure that adjusts for inflation every three years. The most recent adjustment, effective April 1, 2025, raised the cap to $1,738,550, according to the Judicial Conference of the United States.
Amounts that originated in an ERISA-qualified plan and were rolled into an IRA receive broader treatment. The Supreme Court confirmed in Rousey v. Jacoway, 544 U.S. 320 (2005), that rollover IRA funds qualify as “retirement funds” under the Bankruptcy Code. Because those dollars trace back to an employer plan, they are exempt without a dollar cap, meaning a $3 million rollover can be fully shielded in bankruptcy proceedings. One important caveat: the debtor must be able to trace the funds back to the ERISA plan. Commingling rollover money with direct IRA contributions in the same account can complicate that tracing and, in some courts, jeopardize the uncapped treatment.
The catch is that these protections activate only when a debtor enters bankruptcy court. A creditor who wins a civil judgment and never pushes the debtor into bankruptcy must look to state law to determine what portion of an IRA can be seized. That is where the real gap opens.
The state-by-state patchwork
California illustrates how state rules can be far more restrictive than ERISA’s blanket bar. Under Code of Civil Procedure § 704.115, IRAs receive some protection from judgment creditors, but it is not absolute. A court must weigh what is “necessary” to support the debtor in retirement, factoring in age, other assets, and standard of living. A creditor can argue that a large IRA exceeds what the debtor reasonably needs, potentially opening the surplus to levy or garnishment.
Texas sits at the opposite end of the spectrum. Texas Property Code § 42.0021 exempts IRAs and most other qualified retirement accounts from seizure by judgment creditors with no dollar cap, closely mirroring ERISA’s treatment of employer plans. Florida offers similarly broad protection under its state constitution. A surgeon in Houston or Miami and a surgeon in Los Angeles could hold identical rollover IRAs and face dramatically different exposure to the same malpractice judgment.
Other states fall somewhere in between. Some impose fixed dollar caps. Others distinguish between contributory balances and rollover amounts. A handful offer broad protection but allow courts to claw back contributions made within a certain window before a judgment, targeting what they view as last-minute asset sheltering. Because no overarching federal rule governs non-bankruptcy creditor claims against IRAs, the same rollover decision can carry very different risk depending on which side of a state line the account holder lives on.
Inherited IRAs: the protection gap widens
The creditor-protection picture deteriorates further when an IRA passes to a beneficiary. In Clark v. Rameker, 573 U.S. 122 (2014), the Supreme Court held that inherited IRAs do not qualify as “retirement funds” under the Bankruptcy Code because the beneficiary cannot make new contributions and must take distributions. That ruling stripped inherited IRAs of federal bankruptcy protection entirely, leaving them exposed to creditors in most states.
The practical consequence is significant. A worker who spent decades building a $1.5 million IRA may assume the account will pass to a child with some measure of legal shelter. In most jurisdictions, it will not. Workers who plan to leave IRA assets to heirs should understand that the creditor shield they enjoy during their own lifetime likely will not survive the transfer, and should discuss trust-based alternatives with an estate-planning attorney.
Who faces the most risk, and what they can do about it
For most people changing jobs, a rollover into an IRA is a sensible consolidation move. But the legal trade-off is real, and certain groups face outsized exposure. Physicians, attorneys, architects, and other professionals in litigation-heavy fields carry a higher baseline probability of facing large civil judgments. Small-business owners who sign personal guarantees on leases or credit lines create direct paths for creditors to reach personal assets. Real estate developers, contractors, and anyone operating in industries with frequent disputes should also pay attention.
Several alternatives exist. A current employer’s 401(k) will often accept incoming rollovers, keeping the money under ERISA’s umbrella. Some former employers allow terminated participants to leave balances in the old plan indefinitely. Solo 401(k) plans available to self-employed individuals can also qualify for ERISA-like protection under certain conditions, though the details vary by state and plan design.
For workers who do roll assets into an IRA, understanding the specific protections their state offers is not optional. Keeping rollover funds in a separate IRA, rather than commingling them with direct contributions, preserves the ability to trace those dollars back to an ERISA plan if bankruptcy ever becomes relevant. And a short conversation with a financial adviser or estate-planning attorney about state exemption law can surface risks that no fund-selection tool or fee comparison will ever flag.
The goal is not to avoid IRAs altogether. It is to make the rollover decision knowing exactly what protection travels with the money and what gets left behind at the old plan’s door.
Warren Cohen is a finance writer based in Phoenix, Arizona, covering personal finance topics including credit, banking, and beginner investing. He earned his degree in business administration from Arizona State University and began his career working in consumer finance, where he gained direct experience with lending and credit systems. He now writes for personal finance websites and fintech platforms, focusing on clear, practical content that helps readers make informed financial decisions.
