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Can You Protect Your IRA?

You’ve worked so very hard during your lifetime and made a concerted effort to save for your retirement, often times with the goal of leaving a piece of your legacy for your children.

But is your IRA protected?

Keep reading to find the top 5 reasons why naming an individual as the beneficiary of your IRA may not be the right way to go.

Recently, the Supreme Court in a unanimous ruling held that an inherited IRA is not protected in bankruptcy under federal law. There are many reasons as to why but the main ones are because

  • A beneficiary can’t add money to an inherited IRA like a traditional owner can.
  • Beneficiaries must generally begin taking Required Minimum Distributions or (RMDs) in the year after they inherit the accounts regardless of their age.

So, the question remains: How can you plan to shelter your IRA from creditors?

Well, you can name a Trust as beneficiary. By doing so, not only do you gain more control but you shield those funds from creditors down the road or even from the beneficiary’s own poor choices.

While naming a beneficiary outright has several disadvantages:

  • The money could be available to the beneficiary’s creditors, their spouse, partner or even ex-spouse.
  • A younger beneficiary – or even an older one for that matter – may be tempted to take out larger distributions or even cash out the entire account. OR
  • If the beneficiary is a spouse, the spouse would be able to name new beneficiaries.
  • If the beneficiary has special needs, the IRA could cause a loss of government benefits.
  • If the beneficiary becomes incapacitated, a guardian would have to be appointed for the beneficiary.
  • If the beneficiary is a minor, distributions will need to be paid to a guardian; or if no guardian has been appointed; one will have to be appointed by the court.

If you would like to preserve your IRA for your loved ones and stretch the required payments out over the lifetime of your beneficiary, there is a 4 pronged test we must comply with.

The rules regarding inherited IRAs are complex and I caution you to not plan for this alone. Allow me to assist you with protecting your legacy for your loved ones knowing that once you are gone, the monies will still be here.