IRA's DO NOT LAST FOREVER

When people write favorable articles about IRA's, they like to tout the fact that money can be put away, which will be protected and grow for generations.  On June 12, 2014, an opinion written by Justice Sotomayer, in the case of Clark v. Rameker was published by the U.S. Supreme Court (see the opinion at http://www.supremecourt.gov/opinions/13pdf/13-299_mjn0.pdf ).  This opinion has established the rule that IRAs are NOT protected from creditors after they are inherited from the original owners.

In the Clark case the child of the original owner inherited the IRA.  The child had debts.  The child claimed in a proceeding before a bankruptcy court that the creditors could not take the IRA funds to pay the debt from the inherited IRA.  Judge Sotomayer reasoned that:  1. the inherited monies were not the child's retirement,  2.  Congress has protected retirement funds from creditor claims, 3.  Therefore since the inherited funds were no longer retirement monies they were no longer protected from creditors.   Seems to make sense, even though, those of us who love IRAs would like to see them have protected treatment forever.

Even after losing that "forever" creditor protection, the IRA is an excellent choice, where during the life of the original investor/retiree, the investment is protected from creditors without the creation of an irrevocable trust in a state with favorable laws or having an offshore company own the investment.   The Roth IRA, in addition to the creditor protection, has the additional benefit of  tax free growth of the investment ... no need to worry about capital gains tax or any other tax on the money earned in the investment.   That is a great combination.

Compare that to the investment in your home.  The Colorado Homestead  Exemption found at section 38-41-201 C.R.S. protects $60,000 in home equity ($90,000 for older persons) and only the first $250,000 for single homeowners or the first $500,000 for married homeowners is protected from taxes (see http://www.gpo.gov/fdsys/pkg/USCODE-2011-title26/pdf/USCODE-2011-title26-subtitleA-chap1-subchapB-partIII-sec121.pdf ).   There are definite limits to the protections  and tax benefits of home ownership, whereas,  there are no similar limits on the Roth IRA investment.

So, even though the creditor protection on the Roth IRA does not last forever, the Roth IRA is still an excellent way to invest.

Posted on June 15, 2014 .