Individual Retirement Accounts (“IRAs”) are an important part of retirement savings for millions of people, including you, probably. If I’m right about that, you should consider a couple of developments that happened this summer. One addresses bankruptcy protection for inherited IRAs. The other is about QLACs (see below).
First, in Clark et ux. v. Rameker, Trustee, et al., the Supreme Court ruled unanimously that inherited IRAs are not protected in bankruptcy under federal law. This case involved a beneficiary who was the daughter of the decedent. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 provides that, as “retirement funds,” IRAs and Roth IRAs are exempt assets with a cumulative $1 million inflation-adjusted exemption (currently about $1,250,000 – $1,245,475 to be exact) and employer-sponsored plans with an unlimited exemption. Basically, the Supremes said that inherited Individual RETIREMENT Accounts are not RETIREMENT assets for nonspousal beneficiaries under the Federal bankruptcy law. Experts are divided on the application of the Clark decision to spousal beneficiaries.
Some states (including Texas) offer under their bankruptcy statutes expanded protection of inherited IRAs. Don’t get too comfortable. Do all your potential beneficiaries live in Texas or another state with expanded protection of IRAs? Might they move? In any case, you might check with your attorney. While not a particularly tax-friendly solution, naming a trust as an IRA beneficiary may be a possible alternative to consider in some cases.
Second, on July 1, 2014, the Treasury Department published final regulations for qualifying longevity annuity contracts (“QLACs”). Prior to the establishment of QLACs under the Treasury’s auspices, the fair market value of a non-annuitized IRA annuity had to be included in the prior yearend balance of IRAs when calculating required minimum distributions (“RMDs”) from traditional IRAs for folks who have reached 70 ½ years of age. So, in a nutshell, you had to take out more of your IRA assets than you otherwise would/should, while you were protecting yourself from outliving your savings with a longevity annuity you might start to collect when you are 85 years old. If that last sentence does not make much sense to you, you get the point exactly. So did the Treasury. Now, you don’t have to include QLACs in the prior yearend balance for computing your RMD.
There are a lot of rules governing QLACs and their structure. Also, you can’t spend more than the lesser of 25% of your retirement funds (as defined) or $125,000 on QLACs. Insurance companies will be providing a lot of products soon that will meet QLAC requirements. If you think that these may be right for you, start by talking to your wealth adviser.