401(k) Tips

Can the Government Take Your 401(k)?

401(k) are generally protected from creditors and the IRS. But when can the government take your 401(k)?

3 min read

If you’re struggling with debt or have accounts in collections, you may be worried whether creditors and debt collectors can garnish your 401(k). Generally, creditors can’t gain access to the funds in your 401(k) so long as they stay in there. However, the same can’t be said for the federal government.

The IRS can come after 401(k) funds to pay back taxes or other federal obligations. This access is limited to those who are eligible to begin taking distributions. If you don’t qualify to take penalty-free distributions from your 401(k) due to age or other plan restrictions, the IRS can’t take any funds from your 401(k).

While 401(k)s are generally protected from garnishment, there are a few instances where the government can take your 401(k), or a court can order funds to be disbursed from it.

Can the IRS tap into your 401(k)?

Whether or not the federal government can take your 401(k) funds depends on how old you are. 

Traditionally, if you withdraw funds from your 401(k) before your 59½, you’ll be assessed a 10% penalty tax on the amount you took out. This penalty tax is on top of the income tax you will owe since you didn’t pay taxes before you put money into it.

If you owe backed taxes and you’re over 59½, the IRS can seize your 401(k) to satisfy the debts you owe the government.

Though not as common as overdue taxes, the federal government can potentially garnish your 401(k) if you've been convicted of a federal crime and are ordered by a court to pay fines or penalties. 

However, if you are under 59½ and are not permitted to take distributions from your account, the IRS can’t override the regulations protecting your 401(k).

Additionally, if you are found guilty of having mishandled your plan or committed fraud and are ordered through a civil or criminal judgment, you may be ordered to withdraw funds from your 401(k) plan.

Child support and alimony may access your 401(k).

If you get divorced, a court may require you to withdraw your 401(k) funds.

Most commonly, a spouse may be rewarded half of your 401(k) balance through qualified domestic relations order (QDRO). Through a QDRO, a judge can grant a spouse a share of the assets in a retirement account, which you are required to adhere to. You won’t be required to pay any penalty tax on the amount that is withdrawn. However, the receiving spouse must deposit the amount into a qualified retirement savings account to avoid having to pay income tax on the amount.

If you fall behind on your child support or alimony payments, a court can order you to withdraw funds from your 401(k) to settle the unpaid amounts. A QDRO can also allow a spouse to be added to your 401(k) as an "alternate payee." A court can then require funds from the 401(k) to be directed to your spouse rather than to you, should you be in significant arrears on any child support or alimony.

401(k)s are safe from most creditors.

The Employment Retirement Income Security Act of 1974 (ERISA) protects your 401(k) and other retirement accounts from most commercial creditors. ERISA protections even extend to if you file bankruptcy. 

Until you withdraw the funds during retirement for income, your 401(k) funds belong to your 401(k) plan’s administrator—your employer. While your 401(k) is under their plan, they are protected from creditors and cannot be released to anyone but you.

Once the 401(k)’s funds are distributed to you and are in your checking or savings account or you roll over your 401(k)s, creditors can then access them like any other cash account. Although, creditors and debt collectors still need a court order or judgment in order to garnish funds from a bank account.