Your IRA May Not be Protected from Bankruptcy

The more you know, the better prepared you are.



Monopoly-style Bankruptcy Card

This past June, the Supreme Court decided your Inherited IRA is not a retirement fund, and therefore the assets in the account may not be exempt from being included from bankruptcy. Most retirement accounts are exempt, but not an Inherited IRA.

The Bankruptcy Code provides that a debtor(s) may exempt from bankruptcy retirement funds “to the extent that those funds are in a fund or account that is exempt from taxation” under Sec. 401 (401k), 403 (403b), 408 (traditional IRAs), 408A (Roth IRAs), and others.

Essentially the Court said that Inherited IRA accounts are not REAL “retirement accounts.” The reasoning is the traditional IRA and Roth IRA accounts are designed to save for retirement. Qualified contributions to traditional IRAs are tax-deductible, and while contributions to Roth IRAs are not tax-deductible. Qualified distributions from Roth IRAs are tax-free. Most types of withdrawals from either a traditional IRA or a Roth IRA before the account holder reaches the age of 59½ are subject to a 10% penalty and included in the taxpayers taxable income. I am assuming that if you can tax it then it is REAL!

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By contrast, the owner of an Inherited IRA may withdraw funds at any time without paying a tax penalty. The owner must take the funds out within 5 years of the original owner’s death. Or, they may take minimum annual distributions. You may not make a contribution to an Inherited IRA. The argument is that this is not a “saving for retirement” account or an account to be used at one’s retirement.

To the “letter of the law” I get it. However, I don’t like it. Therefore it is imperative to create an Asset Protection Plan for the assets in an Inherited IRA. Not that most of us are planning bankruptcy gosh darn it! Then why create an Asset Protection Plan? More about that later.

raymond-dale-IRA
Ray Dale