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Creditors and Your IRA

We continue to remind you that estate planning is about protecting who and what you love, including yourself! When I meet with married couples, they have two equal concerns: taking care of their children (if they have any and they are still minors), and taking care of each other. Today, we are going to talk about taking care of each other and protecting each other with retirement accounts.

Although spouses receive special treatment when inheriting a retirement account such as an IRA (i.e., the ability to roll over the account into a personal retirement account and to stretch the distributions over their lifetime), the retirement account you leave for your spouse can still be seized in a divorce, a lawsuit, or a bankruptcy proceeding.

Three Options Available to Surviving Spouses

When your surviving spouse inherits your IRA, he or she generally has three options:

1. Cash-out the inherited IRA and pay the income tax - WARNING! The cashed-out IRA will not have creditor protection and accelerates taxation. Once your spouse cashes out the account, he or she may use the money in any chosen manner. In addition, if your spouse dies before all the money has been spent, he or she can leave the money to anyone (even a mere acquaintance who was unknown to you).

2. Maintain the IRA as an inherited IRA - WARNING! The inherited IRA will not have creditor protection. However, under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, a surviving spouse can take the required minimum distributions from this account over his or her lifetime without being held to the ten-year rule, as most other beneficiaries are.

3. Roll over the inherited IRA and treat it as his or her own - WARNING! The spousal rollover may offer some creditor protection but not in all cases. In addition, depending on whom your spouse leaves his or her retirement account to, there is now a larger sum of money to be distributed by the end of the tenth year after his or her death, accelerating additional income taxes for the next beneficiary.