Plans covered by ERISA (the Employee Retirement Income Security Act) are protected from creditors, judgments, and bankruptcy proceedings under federal law. Therefore, money that’s held in an ERISA plan is virtually creditor-proof–only the plan participant’s spouse, the IRS, and the plan itself can attach money held in an ERISA plan, under certain circumstances.
However, not every retirement plan is a federally-protected ERISA plan. ERISA plans must include employees so a retirement plan that covers only a self-employed individual or that individual’s spouse will not be protected from creditors under federal law. One tactic to consider in this situation is to hire your child or a sibling to do legitimate work, thus adding a participating employee and qualifying all the plan assets for creditor protection under ERISA.
Traditional IRAs, Roth IRAs, SIMPLE IRAs, and SEP-IRAs are not ERISA plans so they are not creditor-protected by ERISA. It is true that these plans usually enjoy some protection from creditors but that shelter varies from state to state.
Therefore, you should proceed with caution before rolling over funds from an employer-sponsored plan to an IRA. If your state’s creditor protection of IRAs is weak and safety from creditors is a prime concern, it may be desirable to leave the money in the ERISA plan.
