IRAs Have Bankruptcy Protection But Inherited IRAs Do Not

Certain assets are protected from creditors in bankruptcy. Congress’ intention in carving out those exceptions is to allow debtors to start over without becoming destitute. One important asset protected in bankruptcy is “retirement funds.” Retirement funds include amounts in retirement accounts such as 401(k) plans and individual retirement accounts (IRAs). But the Supreme Court interpreted the term “retirement funds” to exclude inherited IRAs. Because of the Supreme Court’s interpretation, inherited IRAs are not protected in bankruptcy. Keep this in mind when planning your estate. And keep this in mind if you have inherited an IRA.

Kim & Rosado LLP
www.kimrosado.com

#kimandrosadollp #taxlawyer #taxes #tax #generationalwealth #investingtips #wealthmindset #wealthmanagement #investmentstrategies #taxtime #taxfree #taxpreparer #taxreturn #taxprofessional #wealthbuilder #taxplanning #wealthyminds #investmenttips #taxtips #taxpreparation #taxprep #taxconsultant #taxservices #taxpro #taxlaw #creditorprotection #assetprotection #bankruptcy #ira #inheritedira…(read more)

LEARN MORE ABOUT: IRA Accounts

TRANSFER IRA TO GOLD: Gold IRA Account

TRANSFER IRA TO SILVER: Silver IRA Account

REVEALED: Best Gold Backed IRA

Individual retirement accounts (IRAs) have long been a popular tool for retirement savings. With their tax-advantaged status, they are often viewed as a reliable means of building a nest egg for one’s golden years. However, there is one important issue that many people are unaware of: that IRAs have bankruptcy protection, but inherited IRAs do not.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) provided protection for certain types of retirement plans. Under the law, traditional and Roth IRAs are considered protected assets in bankruptcy proceedings. This means that in the event of bankruptcy, creditors cannot seize an IRA, though there are some restrictions on the amount protected.

However, inherited IRAs do not enjoy the same protection. An inherited IRA is a retirement account that is passed on to a beneficiary after the account holder’s death. The beneficiary can either withdraw the funds immediately or spread out the withdrawals over their lifetime, depending on the account’s terms. In either case, inherited IRAs are not afforded the same bankruptcy protection as traditional and Roth IRAs.

This was highlighted in the case of Clark v. Rameker, which was decided by the Supreme Court in 2014. In this case, Heidi Clark inherited an IRA from her mother and then declared bankruptcy. The trustee for her bankruptcy estate argued that the inherited IRA should be included as part of her bankruptcy estate, while Clark argued that the IRA should be protected under federal bankruptcy law.

The Supreme Court ultimately ruled in favor of the trustee. The court’s decision hinged on the fact that an inherited IRA is not a retirement account in the traditional sense. Rather, it is considered a “mere conduit” for passing assets to a beneficiary. As such, it is not entitled to the same bankruptcy protection as an IRA that was established by the account holder.

So what does this mean for those who are thinking about leaving an IRA to their heirs? One option is to consider alternative estate planning strategies, such as a trust or a life insurance policy. These can be structured in a way that provides more protection for beneficiaries in the event of bankruptcy.

Another option is to encourage beneficiaries to withdraw the funds from the inherited IRA as soon as possible. While this may not be the most tax-efficient option, it does reduce the risk of the funds being seized in a bankruptcy proceeding.

Overall, it’s important to understand the nuances of IRA bankruptcy protection and the limitations that apply to inherited IRAs. With the right planning, however, it’s still possible to provide for loved ones even in the face of bankruptcy.