Bankruptcy Law, Credit, Debt Relief

Congress May End Tax Benefits on Inherited IRA’s in the New Year

Retirement accounts may soon be taking a major hit from the IRS, if Congress decides to change the rules on a tax strategy involving inherited IRAs.

Under the current rules, people who contribute to an IRA and do not end up needing the money for retirement are able to pass the account to their heirs.  The money is then allowed to keep growing tax-deferred throughout the heir’s lifetime, with minimal taxes due on withdrawals.

However, the Senate Committee on Finance voted 26-0 to put an end to the ability to stretch an IRA across generations, putting trillions of dollars of legacy wealth in danger of being taxed.

Second to the home, retirement accounts are a household’s greatest source of wealth.  Individuals who inherited traditional IRAs have been able to profit from one of the biggest benefits of the tax code, allowing the tax-deferred balance to continue compounding for years.  The ability to transfer that wealth to second and third generations will be put in jeopardy with this legislation.

The proposed legislation comes after the Supreme Court ruled unanimously that inherited IRAs are not “retirement funds” under the bankruptcy code and are not entitled to exemption from a debtor’s bankruptcy estate.

The proposed law does not apply to surviving spouses.  Surviving spouses may either roll the money over into another retirement account or spread the taxes due on the account across their lifespan.

The proposed rule would not affect Roth IRAs because taxes on those accounts have already been paid with after-tax income by the account owner. Taxes on traditional IRAs are deferred until the account owner begins making withdrawals to cover living expenses during retirement. Heirs are required to continue making annual withdrawals from the inherited account and pay taxes on those withdrawals. The new rule would dramatically speed up the pace of those withdrawals.

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If you are in financial crisis and considering filing for bankruptcy, contact an experienced Miami bankruptcy attorney who can advise you of all your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade & Garcia, P.A. has been helping people from all walks of life build a better tomorrow. Our attorneys’ help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade & Garcia website at www.miamibankruptcy.com.

Bankruptcy Law, Credit, Debt Relief, Timothy Kingcade Posts

Pensions SAVED as court rules retirement funds protected in bankruptcy

In the case Horton v. Henry, the court was recently asked whether savers subject to an Income Payments Order (IPO) would have to surrender their undrawn pension funds in bankruptcy.  Normally, under IPO people are forced to give up a proportion of their salary or wages to pay the bankruptcy trustee, but this landmark case may set a precedent.

The High Court initially rejected the argument in 2014, but the decision went to the Court of Appeal. However, the appeal was dismissed on October 7. The case is in strong contrast to the 2012 Raithatha v Williamson verdict, when the judge said savers could be forced to withdraw their 25% tax-free lump sum to pay creditors.

Bankrupt savers can breathe a little easier now. The ruling follows a similar conclusion reached in Hinton v Wotherspoon in May, which said retirees not taking any income could not be forced to withdraw savings to pay any debts.

Congress updated the bankruptcy laws in 2005. Under the current law, virtually all retirement account and pension plan funds are exempt from creditors, meaning you get to keep them if you file for Chapter 7 bankruptcy.  With a few exceptions to the rule, the exemption amounts are unlimited, so the entire amount of the retirement account is protected.

Plans subject to this exemption include any ERISA-qualified pension plan, such as:

  • 401(k)s
  • 403(b)s
  • IRAs (Roth, SEP, and SIMPLE)
  • Keoghs
  • Profit-sharing plans
  • Money purchase plans, and
  • Defined-benefit plans.

Click here to read more on this story.

If you are in financial crisis and considering filing for bankruptcy, contact an experienced Miami bankruptcy attorney who can advise you of all of your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade & Garcia, P.A. has been helping people from all walks of life build a better tomorrow. Our attorneys’ help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade & Garcia website at www.miamibankruptcy.com.

Related Resources:

http://www.nolo.com/legal-encyclopedia/retirement-plan-bankruptcy-chapter-7-13-32410.html