Is Your IRA Really Protected From Creditors?

By Tim Berry, JD - Email Editor

Date : 19-Feb-2008

Today’s current economic environment is one of real chaos. Real estate values are plummeting, the stock market is so volatile, and investments we thought were a sure thing are now turning out to be nothing but overleveraged crap shoots.

In the midst of this uncertainty, many people are sleeping a little bit better knowing if the worst case scenario does become reality, their nest eggs are protected. To put it bluntly, a lot of us are banking on the fact that our retirement plan accounts are exempt from the claims of creditors.

Is That Really True Though??

Probably Not.

Sure, under the bankruptcy code there is protection for the first million or so assets held within an IRA account. As well, there are state exempt asset laws which exempt assets within a qualified IRA. BUT the devil is in the details. Both the bankruptcy laws and the state exempt asset laws require that assets be within a “qualified” individual retirement account. The killer is a lot of IRAs have already been disqualified, and the owners are completely unaware this has happened.

One of the easiest ways for a qualified account to be disqualified is for the account to engage in something called a prohibited transaction. When an IRA engages in a prohibited transaction, it loses its tax exempt status and is no longer considered an IRA. Hence it is no longer “qualified”.

Say Goodbye to Any Asset Protection.

Here are three examples of an IRA engaging in a prohibited transaction:

Have you ever had a family member manage your IRA? Under the strict rules regarding retirement plans the tax code says if you have a family member manage your account, and that family member receives any commission at all, your account has engaged in a prohibited transaction. Pretty much every financial planner, stock broker, and insurance agent I know has violated this rule. It tends to make Thanksgiving dinners a bit awkward.

Another way of disqualifying the status of your retirement account is extending personal guarantees for your IRA account. Have you ever traded commodities or foreign currencies within your IRA? If you have, there was a high probability the brokerage firm required you to sign a personal guarantee. Amazingly enough, one of the largest stock brokerage firms in America requires individuals to personally guarantee any IRA opened with their firm. The bottom line is, if you sign that guarantee, you no longer have an IRA account nor do you have any Asset Protection for your hard earned nest egg.

A final way that your IRA can become bait for your creditors is by following the advice of your financial planner. The government, in all its infinite wisdom, has decided the following: If you had a financial planner advising you with your retirement plan assets which you accumulated with an employer, your financial planner is now a fiduciary to those assets. No problem there at all, but the government then says if you later “roll over” those funds to the same advisor when you retire, quit, or are laid off, you have probably entered into a prohibited transaction.

In closing, if you are worried about your retirement assets being subject to the claims of any potential creditors, you need to check closely with a tax advisor familiar with the prohibited transaction rules and how they apply to retirement funds, otherwise you could be in for a horrible surprise.

I will be answering questions about IRAs and 401ks on Trustmakers Forum for the next several days. If you have questions regarding prohibited transactions or Asset Protection for your IRA please click here and ask your question on the forum.

Get the latest up to date information about your IRAs.

Two important Education Modules - Both modules are easy to follow audio PowerPoint Presentations that guide you through the maze of legal and technical information and the many misunderstandings about IRA's.

IRA Crisis: We all think that we know the rules regarding IRA
accounts. The problem is that most of us don't have a clue about the
various arcane tax rules that affect IRAs, their tax deferred growth,
and exempt asset status. This 44 minute presentation will make you aware of the everyday mistakes that can cause an IRA to be fully distributed, and
your E & O carrier to gasp.

Checkbooks for IRAs?: It seems the latest buzzword for IRA is either
self-directed, or checkbook control. How much of that is hype and how
much is fact? This 41 minute presentation will walk you through the basic issues
for self directed IRAs, giving you an idea of their power, as well as
some of their weaknesses.

Tim Berry, JD
National Speaker on the subject of Self Directed Retirement Plans

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