Can the Government Take Your 401(k)? What You Need to Know

The security of retirement savings is a significant concern for many Americans, particularly regarding their 401(k) accounts. While these funds are often viewed as safeguarded until retirement, certain circumstances allow government entities to access these assets.

Federal Tax Levies

The Internal Revenue Service (IRS) has the authority to collect unpaid taxes, which includes levying 401(k) accounts. Under Section 6331 of the Internal Revenue Code, the IRS can seize retirement funds to satisfy tax debts, though it typically views retirement accounts as a last resort, often pursuing other assets first.

Before placing a levy on a 401(k), the IRS must follow procedural steps. Taxpayers will receive a Notice and Demand for Payment, followed by a Final Notice of Intent to Levy and a Notice of Your Right to a Hearing. This process provides a 30-day window for taxpayers to address their liabilities or request a Collection Due Process hearing to contest the levy.

Factors such as the taxpayer’s age and potential penalties for early withdrawal are considered. For example, if the taxpayer is under 59½, withdrawing funds incurs a 10% early withdrawal penalty in addition to regular income taxes. The IRS weighs these consequences against the urgency of collecting the debt.

Court-Ordered Criminal Restitution

When individuals are convicted of crimes, courts may impose restitution orders to compensate victims. Under the Mandatory Victims Restitution Act (MVRA) of 1996, courts must order full restitution for victims of certain crimes, including those involving fraud or deceit. Retirement accounts are not exempt from these orders.

Although ERISA generally protects retirement accounts from creditors, exceptions exist for federal tax levies and court-ordered restitution. Courts may issue garnishment orders or writs of execution to access 401(k) funds, but this requires a thorough review of the defendant’s financial situation. Legal protections for retirement accounts must be balanced with the need to compensate victims.

Defendants should consult legal and financial professionals to explore options such as payment plans or modifications to restitution orders to protect their retirement savings.

Government Civil Judgments

Government civil judgments can result from legal disputes involving regulatory non-compliance, environmental violations, or contractual breaches. These judgments can lead to monetary awards against individuals, and in some cases, the enforcement of such judgments may extend to 401(k) accounts.

While ERISA generally shields retirement accounts from creditors, government civil judgments can sometimes bypass these protections. Courts may authorize garnishment of 401(k) funds to satisfy a judgment, depending on federal and state laws. State-specific protections, such as those in Florida and Texas, may limit creditors’ access to retirement funds. However, the outcome depends on the nature of the judgment and the jurisdiction’s laws.

Child Support Enforcement

Child support enforcement ensures parents fulfill their financial obligations to their children. When a non-custodial parent falls behind on payments, enforcement measures can target various assets, including 401(k) accounts. The Child Support Enforcement Act of 1984 empowers states to take action against delinquent parents, potentially accessing retirement funds to cover overdue support.

After a custodial parent or state agency files a claim for unpaid support, courts may issue judgments allowing garnishment of wages and assets. Each state has its own procedures and limits on garnishment, influenced by federal law under the Consumer Credit Protection Act, which caps garnishment at 50-65% of disposable income depending on circumstances.