401(k) vs. IRA: Creditor and Bankruptcy Protection

When planning for retirement, understanding how your savings are protected from creditors and bankruptcy is just as important as maximizing tax advantages and investment returns. Different retirement accounts offer varying levels of legal protection depending on whether you're facing bankruptcy or other creditor claims.

This guide compares the protections available for Solo 401(k) plans, Traditional, Roth, SEPs, and Simple IRAs, and the differences between federal bankruptcy protections and state-level creditor protections, so you can make informed decisions about where to hold your retirement assets. ‍

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1. Federal Bankruptcy Protection

• Traditional & Roth IRAs
• Under federal law, IRAs are protected in bankruptcy up to an inflation-adjusted limit (about $1.7M in 2025, combined for Traditional and Roth IRAs). This limit was updated on April 1, 2025, and will remain in effect through March 31, 2028.
• SEP & SIMPLE IRAs are protected without a dollar cap because they are treated like ERISA-covered plans for bankruptcy purposes.
• Solo 401(k)
• Solo 401(k)s are fully protected under federal bankruptcy law — there is no dollar limit on protection.

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2. ERISA Creditor Protection (Outside Bankruptcy)

• ERISA Plans (e.g., corporate 401(k)s) have the strongest protection from creditors because ERISA provides federal shielding from most lawsuits and judgments.
• Solo 401(k)
• Technically not an ERISA plan (because there are no common-law employees other than you/your spouse), so ERISA protections do not apply.
• However, many states still grant strong protection to Solo 401(k) assets under their own statutes, often similar to ERISA-level protection.
• IRAs
• Protection depends on state law outside of bankruptcy. Some states protect IRAs fully, others have limitations.
• You need to check your state’s statute to know the level of protection from creditors outside of bankruptcy.

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3. Judgment & Lawsuit Protection

• Solo 401(k) usually has stronger protection than IRAs in most states, but this is highly state-specific.
• IRAs may be more vulnerable in states with weaker protections.

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4. Key Considerations

• State Law is Crucial: Outside of bankruptcy, your state law determines protection levels. Some states fully protect IRAs and Solo 401(k)s; others only protect what is “reasonably necessary” for support.
• Federal Bankruptcy Law is Uniform: Solo 401(k)s are fully protected; IRAs are capped (except SEP/SIMPLE IRAs).
• ERISA Advantage: If you can have a regular employer-sponsored 401(k) with employees, that plan would generally have the strongest protections because of ERISA.
• Maintaining Compliance: Adherence to IRS regulations is essential. For example, when your Solo 401(k) plan assets exceed $250,000, you are required to file Form 5500-EZ with the IRS for that year.

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Ready to explore Self-Directed options?

Mountain West IRA can help you open a Self-Directed IRA or Solo 401(k) and guide you through the process of investing in alternative assets—while staying compliant with IRS rules.

📞 Call us at 866-377-3311‍

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