Your TSP Account is Generally Protected under the Qualified Account Under the Employee Retirement Income Security Act (ERISA)
The good news is that your TSP account is a qualified account under the ERISA. This provides protection to your TSP account in the cases of lawsuits and bankruptcy. The funds in your account are held in trust for you by the TSP and are protected from the claims of creditors by a law which provides that these funds may not be assigned or alienated and are not subject to execution, levy, attachment, garnishment, or other legal process. Your TSP funds are exempt from seizure by creditors because they technically aren’t owned by you until you start drawing from those accounts.
When Could Your TSP Account be Vulnerable
Your TSP account might be vulnerable to creditors and other claims in specific situations that include:
If your ex-spouse has a qualified domestic relations order or QRDO, they could claim some of your retirement funds as marital assets or as child support
The IRS can garnish your retirement plans for federal income tax debts
The federal government in general can also garnish or take your retirement account assets for criminal fines and penalties
What Happens if I Declare Bankruptcy with Outstanding TSP loans
According to bankruptcy law, your TSP loan is not a debt because you are borrowing your own money and repaying it to your TSP account. The bankruptcy court does not have jurisdiction over your TSP loan. The TSP is not your creditor. Even during bankruptcy, you must continue making loan payments as provided by the terms of your loan. If loan payments stop for any reason other than approved nonpay status, the TSP will send you a notice explaining how to bring your loan payments up to date. If you do not bring your loan payments up to date, the TSP must close your loan and report the unpaid loan balance and any accrued interest to the Internal Revenue Service (IRS) as income. Besides having to pay income taxes on the taxable amount of the distribution, you may be subject to a 10% IRS early withdrawal penalty if you are under age 59 1/2.
Summary
Most of your assets are subject to loss in the case of lawsuits and bankruptcy. One of the benefits of your TSP account is that it cannot be seized to settle lawsuit judgments nor will it be lost during bankruptcy. That is a huge protection and benefit. If you stay current with your financial obligations from a divorce and stay out of debt to the federal government, your TSP funds are safe from seizure and will be available to you during retirement.
