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Is Solo 401k Protection in Lawsuits Better Than an IRA?

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Does your Solo 401k have more protection than an IRA? Retirement accounts have many benefits beyond the well-known tax breaks. One key benefit is protecting assets by shielding them from lawsuits. However, not all retirement accounts offer the same level of legal protection.

There is a basic and critical fact applied to lawsuits when retirement accounts are involved. Solo 401k protection comes from being a Qualified Retirement Plan, in the eyes of the IRS.

In contrast, each state typically has its own rules for IRAs. Differences at the state level determine when IRAs are fair game for lawsuits.

The fact is that many states don’t protect IRAs nearly as well. Even though the Solo 401k doesn’t generally qualify under Title I of ERISA, it often offers more from lawsuits and bankruptcy courts.

State laws for IRAs really do vary greatly. A few states comply with the federal exemptions but many have separate laws. A common state law for IRAs protects: “the amount deemed necessary to support you, your spouse, and dependents.” In some cases, determining that amount is part of the court proceedings. Most states do not offer any protection for domestic relations debt (divorce, child support, etc.).

Liability Lawsuits

For example, California is vague about IRA protection when it comes to lawsuits and bankruptcy. In fact, an IRA is only protected to the point a court thinks necessary. Any amount that a court sees as above a bare bones retirement may be awarded to the accuser.

Other states with almost no protection for IRAs include:

  • Georgia
  • Maine
  • South Carolina

The above short list does not mean that IRAs in other states are fully protected. Some states protect traditional IRAs but not Roth IRAs. Others like New Hampshire added new protections but did not grandfather old lawsuits.

States like New Mexico provide better protection of assets supporting dependents but not for the person being sued. Others have time limitations. In Arizona, IRA contributions made within 120 days of the lawsuit are at risk (you cannot shield assets shortly before a judgement).

The bottom line is that state IRA laws not only vary greatly but also change often. Because the future is uncertain and there is no federal protection for IRAs, your retirement is never completely safe.

In contrast, Solo 401k protection may provide a safer defense against lawsuits. Typically, only the IRS or a spouse has legal rights to the assets. Congress’s intent for 401k plans is for people to have money when their working days are done. For that reason, Congress gave these plans special protections. The few ways 401k assets can be awarded are by:

  • The IRS to collect federal income taxes owed.
  • Your ex-spouse when a qualified domestic relations order (QDRO) is granted. This is limited to your ex-spouse’s rights to a marital asset or for child support.
  • Criminal or civil judgements for your wrong actions specifically against the 401k account.
  • The federal government for criminal fines and penalties.

Bankruptcy, Creditors, and 401k Protection

There is federal protection for IRAs under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).

BAPCPA does not apply to all of your assets because states can opt-out of federal bankruptcy laws. However, federal law does apply to all eligible retirement funds for Chapter 7 and 13 bankruptcy.


Protection for traditional and Roth IRAs is capped at $1,362,800 for bankruptcies filed between April 1, 2019, and March 31, 2022. If you have more than one traditional or Roth IRA, you can only shield a total of $1,362,800 (not per account).

A bankruptcy court can take any amount over $1,362,800 to repay creditors. The cap adjusts every three years for inflation. It adjusts next on April 1, 2022.

And there is an exception. In 2014, the U.S. Supreme Court determined that inherited IRAs are not shielded unless the IRA is inherited from a spouse.

What To Do Now

Legal problems, divorces, and other unfortunate financial troubles are never something you want to happen. But the ramifications to your well-planned retirement can be life changing. What you do in advance is take steps offering the best protection against the unknown. The first is opening a Solo 401k.

There are some actions you need to take if you want all of the Solo 401k protection. These must contain an “Anti-Alienation” provision. The anti-alienation clause prohibits you from willingly or freely giving your funds away. It prevents the plan administrator from releasing your funds to a creditor. Your account must also be in compliance with the tax code.

Have questions about your Solo 401k? Solo 401K experts at Nabers Group will help you get your retirement funds into your control, where they belong. Contact us here.


Disclaimer: These resources are for informational purposes only. They do not constitute an endorsement or an approval by Nabers Group LLC of any of the products, services, or opinions of any corporation, organization, or individual. Nabers Group LLC bears no responsibility for the accuracy, legality, or content.

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