Myth: Individual retirement accounts (IRAs) are exempt assets in bankruptcy.
Fact: The federal Bankruptcy Code protects up to $1 million of assets (adjusted for inflation every three years) held in IRAs. If you have a large sum of money in IRAs (both traditional and Roth IRAs), creditors may still take some of it. Inherited IRAs are typically not protected in bankruptcy.
Myth: My retirement plan is through my employer and is protected by ERISA (Employee Retirement Income Security Act of 1974).
Fact: Just because your retirement funds are held in an account by your employer does not automatically mean that the plan is an ERISA-covered plan account. For example, IRA-based plans like SEP (simplified employee pension) and SIMPLE (savings incentive match plan for employees) IRAs do not receive ERISA protection.
Frequently Asked Questions
What is an SRT?
A standalone retirement trust, or SRT, is a special type of trust designed to be the beneficiary of your qualified retirement accounts like IRAs, 401(k)s, etc. During your lifetime, your ownership of and access to the accounts do not change. Upon your death, as long as you have properly named the SRT as the beneficiary on the appropriate beneficiary designation form, the trust will become the beneficiary. The trustee of the trust will then be in charge of withdrawing and managing the money received from the inherited retirement account according to the terms of the trust document.
Why would my loved ones need asset protection?
In the United States, lawsuits are filed every few seconds, all year long, every year. We all have a bullseye on our back. Lawsuits commonly stem from car accidents, business failure, divorce, malpractice, tenants, slip-and-falls, bankruptcy, and the like. Without proper protection, inherited property and accounts can be seized for any number of reasons. Because retirement accounts are often one of the most valuable accounts that people own, ensuring that these special accounts are protected for your loved ones and beneficiaries is essential.
What if I use up my retirement account during my lifetime?
By all means, use your retirement funds as you think best. Even after you set up an SRT, you will have full control and the right to enjoy your retirement funds for years. The SRT is named as the beneficiary of your retirement account and will therefore receive funds only once you have died, leaving you free to spend the money as you see fit. However, if you are like most people, you will still have money in your retirement account when you die; that is when the SRT will protect your loved ones and their inheritance.