Just over 10 years ago, in June 2014, the U.S. Supreme Court ruled unanimously, 9-0, that inherited IRAs are NOT protected in bankruptcy under federal law. The primary issue before the Court was whether an inherited IRA is a “retirement account.” Considering the fact that “inherited IRA” is short for “inherited individual retirement arrangement,” this would seem like an odd question to debate. The word “retirement” is right there in the name. Nevertheless, the Supreme Court felt that three primary characteristics of inherited IRAs were not features of a “retirement” account. Those three characteristics were:
Beneficiaries cannot add money to inherited IRAs like IRA owners can to their own accounts. This is true. If a person inherits an IRA from any other person, that beneficiary cannot make any contributions to the inherited IRA. The beneficiary cannot roll over any of their own IRA dollars into that inherited IRA, and they cannot do any Roth conversions with the inherited IRA. Of course, a spouse beneficiary has the option of doing a spousal rollover of the inherited account into her own IRA. The surviving spouse can then make contributions to the account, but this account is no longer considered “inherited.” After a spousal rollover, the account is deemed to have been owned by the surviving spouse since Day 1 and is hers to do with as she pleases.
Beneficiaries of inherited IRAs must generally begin to take required minimum distributions (RMDs) in the year after they inherit the account, regardless of how far away they are from retirement. Remember, this Supreme Court ruling came down in 2014, well before the SECURE Act. Back in the day, under the old rules, any living, breathing beneficiary could set up an inherited IRA and start taking annual RMDs in the year after the year of death. (Now we have the 10-year rule for certain beneficiaries, and annual RMDs do not always apply within the 10-year period.) These annual “stretch” RMDs are based on the beneficiary’s single life expectancy. Annual RMDs do not apply to the original IRA owner until he reaches RMD age (currently age 73). Since annual RMDs applied to beneficiaries at any age (again, under the old rules), then inherited IRAs are NOT retirement accounts.
Beneficiaries can take a total distribution of their inherited IRA at any time and use the funds for any purpose without a penalty. IRA owners under age 59½ cannot take lifetime, penalty-free distributions from their own IRA unless an exception to the 10% early withdrawal penalty applies. The 10% penalty does not apply to distributions from an inherited IRA. A beneficiary at any age can completely drain the inherited account without penalty (although taxes may apply). Therefore, inherited IRAs are NOT retirement accounts in the eyes of the Supreme Court.
A handful of states disagree. For example, Idaho does offer bankruptcy protection to inherited IRAs. But for most inherited IRA owners, it is important to recognize that the favorable bankruptcy protection afforded to such funds under the Federal Bankruptcy Code does NOT extend to them. Based on the Supreme Court’s reasoning on the three items above, this seems like a sensible conclusion.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
Investment advisory services offered through Donato Wealth Management, PLLC, dba Empower Wealth Management and Empower Wealth & Tax (“Empower Wealth Management” or “EWM”),
an SEC registered investment adviser that only conducts business in jurisdictions where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. The firm is not engaged in the practice of law or accounting.
The information presented is believed to be current. It should not be viewed as personalized investment advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. You should consult with a professional adviser before implementing any strategies discussed. Content should not be viewed as an offer to buy or sell any of the securities mentioned, or as legal or tax advice. You should always consult an attorney or tax professional regarding your specific legal or tax situation. Personal investment advice can only be rendered after the engagement of EWM, execution of required documentation, and receipt of required disclosures. All investment and insurance strategies have the potential for profit or loss. Asset allocation and diversification will not necessarily improve an investor’s returns and cannot eliminate the risk of investment losses. Past performance is no guarantee of future results. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD #305031.
Insurance products and tax services are offered through Senior Tax and Insurance Advisors, PLLC, dba Empower Wealth Group (“Empower Wealth Group” or “EWG”). Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products. They do not in any way refer to investment advisory products offered through EWM. Rates and guarantees provided by insurance products and annuities are subject to the financial strength of the issuing insurance company; not guaranteed by any bank or the FDIC. EWG is not affiliated with or endorsed by the U.S. Government, Social Security Administration, nor the federal Medicare program. You may be contacted by a licensed insurance agent. Calling the number above will direct you to a licensed insurance agent. EWG may not offer every plan available in your area. Any information provided is limited to plans available in your area. Please contact Medicare.gov or 1-800-MEDICARE.
EWM and EWG are both affiliated companies of Empower Wealth, LLC (“Empower”). Investment adviser representatives of EWM may have a financial incentive to recommend tax and insurance products and/or services offered through EWG which presents a conflict of interest. This conflict is addressed by EWM’s adoption of its Code of Ethics, which requires that all EWM’s Associated Persons place the interest of clients ahead of their own. Clients of EWM are also free to choose their own tax and/or insurance professionals and are under no obligation to utilize the services offered through any related entities or persons associated with Empower.
Strategic Partners listed on this page are not employees of EWM and are not affiliated through common ownership.
We do not offer every plan available in your area. Any information we provide is limited to those plans we do offer in your area. Please contact Medicare.gov or 1-800-MEDICARE to get information on all of your options.
© Empower Wealth Management All Rights Reserved.
