Inherited Individual Retirement Accounts (IRAs) experienced a see-saw effect with bankruptcy for years. Last year the federal government ruled that IRAs are not protected from federal bankruptcy claims. A year prior in 2013, North Carolina lawmakers passed Senate Bill 279, which protects inherited IRAs from state bankruptcy claims. Complications surface for North Carolina residents owning retirement accounts which name beneficiaries residing in other states. In these cases, distributions from IRAs could be subject to laws in the states of the beneficiaries’ residence, some of which might offer limited protections.
President Obama recently included a proposition in the Treasury Green Book to impose a 5-year limitation for distributions on non-spousal beneficiaries of inherited IRAs. Consolidating distributions over a 5-year term has several drawbacks. One, the retirement assets are not given an opportunity for long-term growth and the beneficiary might not need the funds yet. (Learn more about beneficiaries who have not yet reached the age of majority.) Two, the beneficiary might have income tax consequences as a result of the distributions.
Currently, the timing of distributions for inherited IRAs relies on several factors: Whether a spouse was named as the only beneficiary, whether the account owner died before or after the Required Beginning Date to begin receiving Required Minimum Distributions (RMDs), and the type of IRA. Currently, non-spousal beneficiaries inheriting an account from an owner who died before their Required Beginning Date must start taking distributions one year from the date of death and can stretch distributions over the beneficiary’s lifetime. Obama’s proposed terms would significantly limit this timeframe. The proposal would be effective for distributions from inherited IRAs whose owners who die after December 31, 2015. Obama’s proposition would exempt chronically ill or disabled beneficiaries from the requirements.