As a general rule, IRAs are assets protected from creditors—i.e. IRAs cannot be attached by creditors to satisfy debts or judgments incurred by the IRA owner. However, the Wall Street Journal (Friday, June 13, 2014, page  A6, electronic copy found HERE) reported on a unanimous ruling by the US Supreme Court that changed that protection for some IRAs.

According to the new ruling, inherited IRAs (IRA accounts transferred from the original IRA account holder to a non-spouse beneficiary) are not protected from creditors. IRAs (original and transferred to spouses) are subject to restrictions that do not apply to IRAs transferred to non-spousal beneficiaries. Therefore, since the non-spouse beneficiary has complete access to the full account penalty free (but still subject to income taxes), the Supreme Court ruled that the IRA assets can be attached by creditors.

Given the amount of money in IRAs and the ageing baby boom generation, such non-spousal transfer will become more common. Prudent debt management will prevent some problems; however, judgment awards may still apply.  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

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