The average American with a 401(k) becomes a millionaire in their 50s -but can debt collectors derail that plan?
Some 64 percent of debt collection agencies saw their number of consumer accounts increase or significantly increase in 2025, according to a 2026 industry report from credit bureau TransUnion.
The major problem makes debt collectors’ potential access to 401(k) accounts a relevant concern.
But not to worry, says Virginia-based debt and bankruptcy lawyer Ashley Morgan. There are multiple ways that debt collectors can take your money, but getting into your 401(k) usually isn’t one of them.
“Federal law protects retirement accounts because the law understands that people should be able to preserve and protect their future,” Moody told The Independent in an email. “Ordinary creditors cannot typically garnish or seize money from your 401(k) because you have unpaid credit card debt, medical bills, or personal loans.”
Federal law typically protects 401(k)s from bankruptcy, too, she said, but that doesn’t mean it’s completely safe.
Retirement at risk
There are two situations in which a third party can legally gain access to someone’s 401(k), said Elias Friedman, a certified financial planner and senior wealth advisor at Kadima Wealth.
The Internal Revenue Service (IRS) can take money from a taxpayer’s 401(k) if they have unpaid taxes. But the IRS doesn’t take retirement funds from everyone who owes money - just certain people.
“It is not common that the IRS [levies] a retirement account, but it can happen in specific situations,” Morgan said. “I often see it when people have large tax balances that have been completely ignored for years.”
The second situation where 401(k)s are at risk is during divorce proceedings. Courts can order one spouse to give a certain percentage of their retirement savings to the other spouse.
That usually happens through what’s known as a “qualified domestic relations order,” Morgan said.
Use it wisely
While 401(k) money has federal protection when it's in the account, that protection vanishes for any money the account holder withdraws.
And that’s where people need to be smart about how they use their 401(k) cash, Morgan said.
“If a creditor has the ability to garnish a bank account under state law, having withdrawn retirement money beforehand can create risks that did not exist while the funds remained inside the retirement plan,” she said.
So, consumers should leave money in their 401(k) for as long as they can.
That means avoiding 401(k) withdrawals for paying down debt. It seems counterintuitive but Morgan explains why it makes sense.
“People cashing out retirement accounts to pay off credit card debt can often be a mistake,” she said. “Before touching a retirement account, I think people should understand all of their options.”
Those options include:
- Hardship programs that may reduce or suspend payments because of, for example, a job loss
- Debt settlement plans in which a third-party negotiates with creditors to lower the amount owed
- Debt management plans from credit counseling agencies that offer debt repayment through a single monthly payment
- Bankruptcy
In each case, consumers don’t have to surrender their retirement funds to pay down debt.
“Each option can help someone; it all depends on their overall financial situation, including other assets, debts, income, age and goals,” Morgan said. “Many people are surprised to learn that bankruptcy often protects retirement accounts while also addressing the unsecured debt they were about to cash out those retirement savings to pay.”
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