Could Your IRA & 401(k) Wind Up Paying Off Your Heirs' Creditors?

You are receiving this email because you signed up to receive Bob Carlson's free e-letter Retirement Watch Weekly, or you purchased a product or service from its publisher, Eagle Financial Publications. [Carlson's Retirement Watch Weekly] [Retirement Reports](www.retirementwatch.com/retirement-resources/) [Retirement Articles](www.retirementwatch.com/retirement-articles/) Brought to you by Eagle Financial Publications Could Your IRA & 401(k) Wind Up Paying Off Your Heirs' Creditors? by Bob Carlson Editor, [Retirement Watch]( 12/17/2023 SPONSORED [Wall Street Insider Makes Prediction about Hot A.I. Stock]( [image]( 50-year Wall Street Veteran Marc Chaikin just detailed why he's avoiding NVDA and buying this overlooked A.I. stock instead. [Learn more here.]( [CLICK HERE...]( Fellow Investor, [Bob Carlson]As part of your estate plan, you need to consider whether it’s possible your IRA or 401(k) could end up in the hands of creditors of one of your heirs. A general rule is that qualified retirement plans are exempt from bankruptcy claims. But that general rule applies only to the original owner of the account. Beyond that, the situation is murky. In 2014, the U.S. Supreme Court ruled that an inherited IRA could be seized by the beneficiary’s creditors. While federal bankruptcy law protects the IRA of an original owner from the owner’s creditors up to a certain value, that protection doesn’t apply to a beneficiary. The federal bankruptcy protection applies only to a person’s retirement account. Once an IRA is inherited, the retirement account exemption under federal bankruptcy law doesn’t apply. In a 2015 bankruptcy court case, the court ruled that someone who received interests in three retirement plans through a divorce also couldn’t protect those accounts from his creditors. This year, a federal bankruptcy court considered whether an inherited 401(k) could be paid to creditors of the beneficiary in bankruptcy. In this case, the assets still were in the 401(k) plan when the bankruptcy proceedings were conducted. Later, the 401(k) administrator distributed the assets to an IRA established for the beneficiary. The creditors learned about this and argued that they should be able to claim the IRA needed to pay the debts. The court disagreed. The assets hadn’t been distributed from the 401(k) plan at the time of the bankruptcy proceedings, and there were legal restrictions that prevented them from being distributed at that time. There also were restrictions on what the beneficiary could do with the assets in the 401(k). SPONSORED [Are You or Your Children Dangerously Underinsured?]( [image]( While no one likes to think about dying and the consequences, we must remember that our family and business future is at stake if we are not adequately insured. 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The recent decisions could be appealed and overturned. Or other courts in the future might rule differently. Also, these cases concern federal bankruptcy law. States have their own bankruptcy laws, and many of them give retirement accounts more protection than federal law. The results might be different when bankruptcy actions are under state law instead of federal law. These cases also involve beneficiaries who weren’t spouses of the original account owners. Spouses receive more protection when a retirement account is inherited. Last month, in my Retirement Watch subscription service, I discussed how to decide whether to leave money in a 401(k) plan or roll it over to an IRA. When your beneficiary is likely to have problems with creditors, that is another reason to consider leaving the money in the 401(k) plan for as long as possible. As always, it's a good idea to discuss the details and trade-offs with your estate planning attorney. To a better retirement, [Bob Carlson] Bob Carlson Editor, Retirement Watch Weekly Editor’s Note: The legendary tech futurist who predicted the rise of Amazon, Netflix, and Apple YEARS in advance now says: “The biggest, most profitable technological advances in the future will ALL stem from this single breakthrough. Millionaires will be minted overnight.” [He’s revealing EVERYTHING here.]( SPONSORED [Trade Smarter: Discover Hidden Opportunities w/ A.I.]( [image]( The world’s leading artificial intelligence is forecasting trends in the market in our Free Live A.I. Training. [Save your seat to watch live >>]( [CLICK HERE...]( Want More Retirement Advice? Check out my website, [RetirementWatch.com](, where you’ll find hundreds of free articles covering every aspect of retirement planning. Popular Posts: [Nine Important Things to Know Before Contributing to an IRA]( [How to Help Children or Grandchildren Buy a Home]( [Building the Complete Estate Plan]( [Finding Higher Returns With Low Risk]( New to the Retirement Watch Community: SeniorResource.com So, you’ve been thinking about setting up a trust to handle your estate planning. Specifically, your advisor may have mentioned something called a revocable living trust. But what in the world is it and is it really the best option for you? To help you make up your mind, [click here to take an in-depth look]( at the key pros and cons of using a revocable living trust as part of your estate planning process. About Bob Carlson: [Bob Carlson]Robert C. Carlson is the author of the books The New Rules of Retirement and Retirement Tax Guide, editor and investment director of the popular retirement newsletter, Retirement Watch, and editor of the free weekly e-letter, Retirement Watch Weekly. 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