Tuesday, June 07, 2005

Protection from Creditors through IRA Accounts

U.S. Supreme Court Extends Bankruptcy Protection to IRA Accounts
Employee IRA accounts are safe from creditors! The Court ruled that an individual's IRA account balances are safe from the claims of creditors in bankruptcy. The ruling makes it clear that balances in any retirement plan that restricts access to payments with plan provisions governed by ERISA, or just an early withdrawal penalty, are protected whether the plan is an ERISA plan or an IRA.

10% Penalty on Early withdrawal has a Silver Lining
Basis for the Court's Decision is that dreaded 10% penalty incurred if funds are withdrawn before age 59%. The Court stated that 10% is a lot! Since the 10% "restriction" is removed when the individual reaches age 59 ½, the right to payment is a right to payment "on account of age," and the fund is protected, not by the anti-alienation provision of ERISA, but by the Bankruptcy Code itself.

That analysis is supported by:
-A requirement that distributions must begin no later then the year after the year in which the IRA owner turns 70 ½
-IRA accounts are not taxed until money is distributed
-withdrawals before age 59 ½ are subject to a 10% penalty