Slott and Company warned that in several cases, failure to comply with rules for qualified retirement plans and prohibited transactions within IRAs led to court rulings that resulted in a loss of bankruptcy protection in an IRA. Furthermore, inherited IRAs are typically not protected in bankruptcies.
7. A Year Of Death Distribution
Beneficiaries must take any required distribution not taken by an IRA’s owner in the year of their death. Year of death distributions are not paid to an estate unless the estate is named as the beneficiary.
The beneficiary is responsible for paying taxes on the year-of-death distribution as well.
8. Medicaid Treatment Of Retirement Accounts
Because Medicaid is administered by individual states, the treatment of retirement assets may vary from state to state and an IRA’s assets may count against a client’s Medicaid eligibility and distributions, even required minimum distributions, may be treated as income.
Advisors should be particularly wary of Roth IRAs, which Slott and Company referred to as a “Medicaid trap.” In most cases, a Roth account’s assets will be counted against an individual’s Medicaid eligibility.
“If you have a client on Medicaid who wants to do a conversion to a Roth, be very careful,” said Ives. “It could effect things down the road for him or her.”
9. IRAs and Wills
IRAs generally don’t pass through wills. Slott and Company warned that IRAs should almost never change hands via a will, as it is preferable for IRAs to pass via beneficiary forms.