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Inherited IRAs are Not Considered "Retirement" Accounts

When a person sets up an Individual retirement account for themselves they usually are thinking that if something should happen to them, then their account is under the possession of the beneficiary of their choice. Which is true, however, when a person sets up an IRA with a chosen beneficiary do they think about if this account can be affected financially, such as through a bankruptcy. No, most IRA owners do not. This is because too many people who do have IRAs or have inherited those from an original owner never realize that if faced with bankruptcy their inherited IRA is at risk.

Individual Retirement Accounts are protected under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005. However, recently a lot of controversy has been up for debate about whether this act applies to IRAs that are inherited.

The decision that an IRA that is inherited from its original owner loses its protection from bankruptcy has been made recently by the Supreme Court for many reasons; one of which is that they feel that inherited IRAs do not have the same characteristics of a "retirement" account. Such characteristics of inherited IRAs are:

· Beneficiaries cannot add money to inherited IRAs, where original owners of an IRA are free to do so as they please.

· Inherited IRAs require minimum distributions to start within a year of the inheritance, no matter how many years that beneficiary is from retirement.

· Inheritors of the account can take out as many distributions whenever they want, where IRA owners usually need to wait until they are 59 ½ before beginning to take out a distribution from the account without penalty.

It is important to keep in mind that this Supreme Court decision applies to inherited IRAs that have beneficiaries other than the original owner's spouse.

Florida debtors need to be aware that inherited IRA's may be claimed as exempt under Florida Statute 222.21(2)(c) as that statute has been recently amended to clarify existing law regarding the exemption of inherited IRA'S. However, the legislature then left the requirement that the inherited IRA still be maintained in accordance with a plan or governing instrument that has been determined by the Internal Revenue Service to be exempt from taxation under s. 401(a), s. 403(a), s. 403(b), s. 408, s. 408A, s. 409, s. 414, s. 457(b), or s. 501(a) of the Internal Revenue Code of 1986. There are no reported decisions regarding the amended statute. Therefore, the creditors may not let this one pass without a challenge.

From this recent debate many beneficiaries of inherited IRAs who are at risk of facing a bankruptcy can be largely affected. To protect your own retirement account from bankruptcy, one should consider naming a trust as their IRA beneficiary. In doing this it gives your heirs better protection of savings against bankruptcy. However, you need to consider many factors before moving forward and finding a trust. The size of your IRA and how likely it is that your beneficiaries will run into problems with creditors or face a bankruptcy, are issues to think about before making a decision.

To help make your decision, if need be, a less stressful one you should contact an attorney experienced with handling Individual Retirement Accounts and who has knowledge of bankruptcies. In taking these steps and precautions you can protect your wealth and know that your loved ones will be taken care of, if something should happen.

Work Cited:

Ed Slott and Company - IRA, Tax, Retirement Planning Articles, Insight (Supreme Court: Inherited IRAs are NOT Retirement Accounts ... and What This Means For You ~)

http://www.theslottreport.com/2014/06/supreme-court-inherited-iras-are-not.html

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