An Individual Retirement Account is a savings plan designed to give tax-deferred growth for the account holder. Funds can be taken out at age 59 1/2 and beyond without an IRS-imposed early distribution penalty. While the IRA is an asset, it is not always an accessible one.
The IRA is considered a part of the owner's taxable estate upon death. This means that the value of the IRA is added to the gross estate value and considered for estate transfer taxes. As of 2011, an estate over $5 million has an estate transfer tax rate of 35 percent. The IRA gets hit not only with estate taxes upon death, but also with income taxes for distributions made from the IRA upon death. Someone paying both estate and income tax can lose 75 percent of this asset to taxes.
Loan Collateral Asset
The Internal Revenue Service is very clear on the use of an IRA as collateral for a loan; it is strictly prohibited. This means a brokerage IRA cannot be used as an asset for an options account. It is also prohibited to leverage the IRA in any way, meaning by writing a note as collateral in a private bet. Whether the IRA owner or a spouse engages in prohibited transactions, the result is the same. The entire IRA is distributed, taxed and penalized. Keep in mind that a mortgage or auto lender may look at IRA assets, but this is not an asset that can be used to obtain a loan.
Bankruptcy and Creditor Claims
IRAs are protected assets under federal law. While every state has slightly different protection values, the base value of $1 million is protected from creditor claims, judgments and bankruptcy. This benefit helps protect the federal government from having insolvent individuals rely on federal resources at a later date because retirement assets are exhausted. So while a debt claim representative may try to bully you into using retirement assets to pay off a debt, you are not required to and they are not able to place a judgment on your IRA.
Medicaid Countable Assets
To qualify for Medicaid and certain other federal low-income aid programs, your assets must not exceed certain limits. For example, filing and being approved for Medicaid requires less than $2,000 in countable assets. Cash, bank deposits, brokerage assets, real estate and retirement funds, including IRA money are considered a countable asset.
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