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Heritage Tree LogoAre Inherited IRAs Protected from Creditors?

IRA piggy bank

It is sad to think about a time when your beneficiary finds themself in a financially dire situation. It is worse if this occurs when you are not around to provide them with financial aid yourself. You may do everything possible to leave enough behind for them in your estate plan. However, certain inherited accounts may not be off-limits to their creditors’ collection activities. Particularly, your concern may lie in the Individual Retirement Account (IRA) you left for them. Continue reading to learn whether inherited IRAs are protected from the collection activities of creditors and how one of the experienced Butler County estate planning & probate attorneys at Heritage Elder Law & Estate Planning, LLC can help out your beneficiaries.

What is an inherited IRA?

Otherwise known as a beneficiary IRA, an inherited IRA is an account opened when your beneficiary inherits your IRA or employer-sponsored retirement account upon your unfortunate passing.

The benefit to this account is that your beneficiary may withdraw money straightaway without incurring any penalties. What’s more, these funds may remain tax deferred. However, your beneficiary must understand they cannot make additional contributions and grow the funds within this account. In turn, they can be generally required to liquidate this account upon the 10th year following your unfortunate passing.

It is also worth mentioning that an inherited IRA varies from a custodial IRA. Namely, a custodial IRA is an account you may manage for your minor beneficiary with earned income until they reach a specified age (i.e., generally between 18 to 25).

Are inherited IRAs protected from the collection activities of creditors?

Of note, on June 12, 2014, the United States Supreme Court ruled that IRAs inherited by any beneficiary other than a spouse are not considered retirement funds. This is because, to reiterate, a beneficiary may withdraw funds at any time rather than having to wait for retirement. Therefore, these accounts may not be protected from creditors’ collection activities.

The silver lining to this is that your beneficiary may use these funds to pay off their creditors during bankruptcy, something that would have been more challenging to do otherwise. So, in a way, you can consider that these funds still serve as their financial aid in a dire situation.

However, your primary wish for leaving behind an inherited IRA may have been so that your beneficiary received tax-deferred earnings for the many years to come. A better way to accomplish this is if you assign a trust as the beneficiary of the IRA rather than your beneficiary themself. In this way, these funds may be safeguarded from creditors’ encroachment.

To allow proper protections to be implemented, it is in your best interest to retain the services of one of the skilled Butler County estate planning & probate attorneys. Contact Heritage Elder Law & Estate Planning, LLC today.

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