Your retirement funds are protected from creditors even if you file for
bankruptcy, with only a few limitations. This protection extends to funds in
all government-qualified pension plans, including IRAs (traditional and Roth),
401(k)s, 403(b)s, Keoghs, profit sharing, money purchase, and defined benefit
plans. A recent U.S. Supreme Court decision has held, however, that an
inherited IRA is not a "retirement fund" and therefore doesn't
qualify for bankruptcy protection.
An inherited IRA is a traditional or Roth IRA
that a deceased owner has bequeathed to a beneficiary. It differs from a "true"
retirement account in three ways:
1.
The beneficiary is not allowed to contribute additional retirement
funds to the inherited IRA.
2.
The beneficiary, regardless of age, may withdraw funds from an
inherited IRA in any amount and at any time without penalty.
3.
The beneficiary, regardless of age, is required to take annual minimum
distributions from any inherited IRA.
Based on the above characteristics, the Court unanimously concluded
that with respect to beneficiaries, inherited IRAs are "not funds
objectively set aside for one's retirement" and instead constitute a "pot
of money that can be used freely for current consumption."
Although the Court didn't specifically address it, there is a possible
option available if (and only if) the
beneficiary is the spouse of the decedent. Spouses are permitted to roll over
funds from inherited IRAs into their own IRAs, which would presumably bring
those funds back under bankruptcy protection. The funds would, however, become
subject to the rules that apply to non-inherited IRAs, such as penalties for
withdrawals before age 59½.
Certain other strategies may be available if you have inherited or are
likely to inherit an IRA and you are interested in possible bankruptcy protection.
Call us for an appointment to discuss your options.
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