In general, IRAs, 401(k)s and pensions are exempt from the account owner’s creditors under Illinois law. They cannot be seized or garnished by creditors. In an article by Bruce E. Bell, Protecting Retirement Plan Assets from Creditors, he points out that assets passing to beneficiaries of the deceased plan owner are also in many cases exempt from claims of creditors. Exceptions include divorcing spouses, child support obligations and some Federal tax obligations.
Regarding bankruptcy, IRAs are exempt subject to a statutory cap which is currently $1,283,025. IRA owners can avoid this cap by creating a trust to hold the owner’s retirement assets at the owner’s death. With this trust in place, the beneficiaries of the IRA owner are protected in the event a beneficiary declares bankruptcy.
It is important not to comingle conventional IRA assets with funds rolled over from qualified retirement plans. The qualified retirement plan funds should be rolled into a separate IRA containing only funds which originated from qualified retirement plans. This segregating will allow all qualified retirement plan funds to be exempt from bankruptcy.Consult your estate planning attorney for further information.