Are Inherited IRAs Protected From Creditors?

Most people who file for bankruptcy automatically think of their Individual Retirement Account (IRA) and 401(k) accounts as the most common type of assets that are exempt from being lost in bankruptcy and kept safe from creditors. As a result, many people believe that they will be allowed to exit the bankruptcy process with their retirement accounts untouched, which will greatly facilitate making a fresh start.

The answer, however, is much more complicated if an IRA is inherited. If a person inherits the IRA from a spouse, however, the IRA will not qualify as exempt from bankruptcy and as a result will subject to collection efforts from creditors. In 2014, the Supreme Court issued a ruling in the case of Clark v. Rameker that an inherited IRA someone other than a spouse is not classified as a bankruptcy exemption.

In drawing the distinctions between inherited IRAs and participant owned IRAs, the court noted three differences – the beneficiary of an inherited IRA cannot make additional contributions to the account but a participant IRA, an inherited IRA beneficiary must take required minimum distributions from the account but an IRA owner can defer distribution until the age of 70 and ½, and the beneficiary of an inherited IRA can withdraw all of the funds at any time without penalty while a participant IRA owner must wait until 59 and ½ to withdraw from the account without being penalized.

The Benefits of Roth IRAs

Inherited IRAs can be either traditional or Roth IRAs. While many people are familiar with Roth IRAs, special note should be made of Roth IRAs that are funded through already taxed income. Despite the risk that a Roth IRA might be pursued by a creditor, there are some distinct advantages that can be realized through these estate plans, which include the following:

• Roth IRA benefits are not subject to annual requirements regarding minimal withdrawals in the same as traditional IRAs. This means that if you plan on using an IRA to place savings for a long period of time, it is a much better idea to use a Roth IRA instead of a traditional IRA.
• After a person dies, Roth IRA balances become subject to a unique set of minimum withdrawal requirements. This means that a person’s heirs will be required to make required annual withdrawals, which will be federal income tax free provided that at least one of the Roth IRAs being used has been opened for more than five years at the time that withdrawals begin. Many times, a person’s heirs are able to protract withdrawals over many years and continue earning tax free income on the remaining balance in the Roth IRA.

Talk with a Skilled Estate Planning Attorney Today

If you believe that an inherited IRA will be protected from the bankruptcy process, it is always a wise idea to confirm this perspective with a bankruptcy attorney. If you decide to file for bankruptcy and later learn that your inherited 401(k) will not be protected, there will be little to do at that point to protect yourself. Contact attorney Jim A Lyon today for assistance with your bankruptcy case.