FOR IMMEDIATE RELEASE
Washington, DC, July 17, 2014 — An inherited IRA does not have the same protection from creditors as an IRA originally saved for the purpose of retirement. That’s a result of a recent Supreme Court ruling, says CERTIFIED FINANCIAL PLANNER™ professional Bryan Beatty.
Why does this matter? “Because it could make an impact on your retirement savings,” explains Beatty, a partner with Egan, Berger & Weiner, LLC.
IRAs and Roth IRAs receive what is known as a “retirement funds” exemption under Section 522 of the Bankruptcy Code. This exempts tax-exempt retirement funds from a bankruptcy estate.
Except when it doesn’t. Here’s why.
Clark v. Rameker, Trustee
In the recent court case Clark v. Rameker, Trustee, the Supreme Court ruled on June 12, 2014, that an inherited IRA does not have the same creditor protection as an IRA that was originally saved for the purpose of retirement.
While the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which was signed into law in April 2005, was meant to make bankruptcy filings less appealing—it contained a protection for retirement funds. This protection allows IRAs and Roth IRAs a total of $1 million exemption, adjusted for inflation (today that amount is equal to $1,245,475).
Employer-sponsored plans received an unlimited exemption.
So this presents a challenge to the old way of doing things.
Though inherited IRAs aren’t the norm, spouse-inherited IRAs do exist. Only now maybe they shouldn’t. Here’s the issue:
- A spouse is allowed to combine an inherited IRA from a deceased spouse with their own IRA, unlike other inheritor relationships to IRA owners. But if a spouse does not take the extra step of rolling over an inherited IRA into the spouse’s own IRA, then the spouse now apparently may not have the same creditor protection for that inherited IRA.
- Non-spousal IRA beneficiaries may find it preferable to inherit these retirement funds via a trust. Mind you, the law surrounding this approach is tricky and requires the use of special language since it must comply not only with trust rules, but also with IRA and IRS rules specific to retirement accounts. Crafting this language requires the expertise of an attorney who specializes in such matters.
- Regarding the unlimited protection afforded by a company-sponsored retirement plan, you might think that you could expect better protection as a beneficiary of an inherited IRA; however, that is not necessarily the case.
- Unless the plan document says so, a non-spouse beneficiary is typically not entitled to inherit the asset as a 401k or 403b and is then subject to a rollover to an inherited IRA, which presents the exact same challenges.
Especially if you have received an inheritance recently, whether or not of an IRA, now might be a good time to update your beneficiaries and review your estate plan.
To interview Beatty on this topic: Send an email to Hope Katz Gibbs, email@example.com.
About Bryan D. Beatty, CFP®, AIF®
Financial Planner / Partner
- Partner of Egan, Berger & Weiner LLC
- 22 years of experience in the financial industry as the principal of an independent financial services firm with a focus on all aspects of investment and retirement planning
- Graduate of University of Maryland, with a BS in Finance; former president of the Finance, Banking and Investment Society
- CERTIFIED FINANCIAL PLANNER™ practitioner
- Active member of the Financial Planning Association’s Career Development and College Outreach Committees.
An avid lifelong musician, Bryan plays guitar and writes music in his spare time and occasionally plays area venues. Originally from Baltimore, MD, Bryan has lived in Northern Virginia since 1992.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
Egan, Berger & Weiner, LLC is an independent financial services firm based in Northern Virginia. EBW associates have decades of experience in helping clients plan ahead for retirement.
What do you need to know about planning ahead for retirement? Visit EBW’s Financial News for insights on making financial decisions. To learn more about EBW’s financial planning services, visit www.ebwllc.com or call EBW at 703-506-0030.
_Securities and Investment Advisory Services offered through Voya Financial Advisors, member
SIPC. Egan, Berger & Weiner, LLC is not a subsidiary of nor controlled by Voya Financial Advisors._