Did you know your IRA offers you protection?
Most people are unaware that typically assets held within their Individual Retirement Accounts (IRAs) are protected from creditors, including being shielded from US federal bankruptcy proceedings. Every three years, the level of protection increases with inflation. For 2016, the number is $1,283,02511.
It would be very difficult for the average investor to breach this limit. Why? Because even if the investor has been contributing since IRAs have been available, they would’ve had to maximize funding and had stellar investment performance…both unlikely scenarios. The cap applies not only to IRA, but also to Roth IRA tax-year contributions and earnings on those contributions.
However, there is very good news if you’d like to increase your level of asset protection. By rolling over employer plans, the amount of protection goes up by the rollover amount. As an example, if an investor had $900,000 in an IRA, but, decides to rollover their 401(k), which is valued at $2,000,000, the full $2,900,000 would be shielded. This includes SEP and SIMPLE IRA funds. So, if you maintain dormant retirement plan accounts, it may make sense to roll your assets over into an IRA. As always, it is advisable you seek counsel from an accredited tax consultant before making a decision.
On the negative side, the Supreme Court ruled in a 2014 case that inherited IRAs are not protected in bankruptcy under federal statutes.
We’ve looked at bankruptcy, but, how about general creditors? Do IRAs garner the same amount of protection? There is NO general creditor protection for IRAs at the federal level. However, general creditor protection is determined at the state level and can vary widely from state to state. Some states offer no protection for IRAs in respect of general creditors.
What if you owed money to the Internal Revenue Service (IRS)? Would your IRA be protected? Sadly, no. Most people are unaware that the IRS can levy your IRA. The typical protocol for the IRS would be to levy other accounts first before zeroing in on your IRA. If by some unfortunate circumstance your IRA becomes levied by the IRS, it would be taxable to you. As you may be aware, accessing your IRA prior to age 59 ½ normally incurs a 10% early distribution penalty, however, if previously mentioned IRS levy is placed on a taxpayer who has yet to reach the age of 59 ½, the 10% early distribution penalty doesn’t apply.
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.