Few assets are protected as fiercely as a retirement account. Federal law walls off your own IRA and 401(k) from most creditors, and if you file for bankruptcy, that shield can stretch to over $1.7 million for the IRA portion alone. That means borrowers who lose nearly everything else in a bankruptcy case will often emerge with their nest egg untouched — a result that's been engineered on purpose, with the reasoning that your retirement savings shouldn't be sacrificed to satisfy old debts.

In turn, it would be reasonable to assume that inheriting someone else's IRA means you're inheriting that same fortress of protection, which is especially important to some borrowers right now, given how high household debt is — and how quickly those balances are growing. After all, an inherited IRA still sits at the same brokerage, still wears the IRA label and is still subject to Internal Revenue Service (IRS) regulations.

But while retirement accounts often carry important legal protections, inherited IRAs actually follow a unique set of rules. So, are those inherited retirement funds protected from creditors, or are they at risk in the collections process? That's what we'll examine.

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Can creditors garnish money from an inherited IRA?

In many cases, inherited IRAs do not receive the same level of protection that traditional or Roth IRAs do. The Supreme Court decided in 2014 that inherited IRAs do not qualify as retirement funds for purposes of federal bankruptcy protection, as beneficiaries cannot make new contributions and are often required to take distributions from the account. That ruling made inherited IRAs more vulnerable in bankruptcy proceedings than retirement accounts owned by the original account holder.

Outside bankruptcy, though, the creditor-protection rules for inherited IRAs can vary significantly by state. Some states offer strong protections for inherited IRAs, while others provide limited or no protection. That means whether a creditor can successfully access or garnish funds from an inherited IRA may depend largely on where you live and the specific circumstances of your case.

It's also important to understand that there's a big difference between having debt and facing a court judgment after being sued by a creditor. Creditors generally cannot just reach into an inherited IRA to collect what's owed simply because you're behind on payments. Most creditors must first sue you, obtain a judgment and pursue legal collection remedies. Once that happens, the account could become a target, depending on applicable laws.

Distributions taken from an inherited IRA may face even fewer protections. Once funds leave the account and are deposited into a checking or savings account, they often lose any protections that may have applied while they remained inside the inherited IRA. At that point, the money could become vulnerable to bank levies, garnishments or other collection efforts, provided that a creditor has legal authority to pursue them.

Because inherited IRA protections differ so widely, beneficiaries who are facing debt collection issues may want to consult an attorney or financial professional familiar with their state's laws before making withdrawal decisions or assuming the account is fully protected.

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What to do if debt problems put your inherited IRA at risk

If you're worried that creditor action could eventually threaten inherited IRA assets, taking steps to address your debt proactively may help reduce that risk. One option you have is debt settlement.

The goal of debt settlement is to negotiate with your creditors to resolve your delinquent debts, like your credit card balances, for less than the full amount owed. This process can make it easier and more affordable to get rid of your debt before it escalates to a lawsuit and puts your inherited IRA funds at risk, but it can also have downsides. So, it's important to weigh all the factors before moving forward.

Debt consolidation may also be worth exploring in this scenario, particularly if you're still current on your payments but need some relief from high interest charges. Consolidating multiple high-rate debts into a single loan with a lower interest rate can simplify the repayment process and lower your monthly costs, making your debt more manageable and reducing the likelihood of falling behind.

Credit counseling is another option available to you. A credit counseling agency can help you review your financial situation, create a manageable budget and, in some cases, establish a debt management plan that lowers your interest rates and fees. That, in turn, can make it easier to stay on track with your payments and avoid falling behind.

The bottom line

Whether creditors can garnish money from an inherited IRA depends on a variety of factors, including state laws, the type of debt involved and whether a creditor has obtained a judgment against you. While inherited IRAs may receive some protection in certain situations, they generally do not enjoy the same broad protections available to many retirement accounts owned by the original saver. So, if you're carrying significant debt and have inherited an IRA, understanding your state's rules and exploring debt relief options early can help you make the most informed decision possible to help protect your finances.