Pay attention to the care and feeding of your IRA.

The Individual Retirement Account (IRA) is the greatest thing since sliced bread, as evidenced by the trillions of dollars that have poured into IRAs over the last 20 years. Creation of and contribution to an IRA is not the end of the planning process, however. Significant planning issues must be addressed in order to take full advantage of the benefits offered by your IRA. Two of these issues that need current consideration are the status of creditor claims against IRAs, and the best way for you (and your beneficiaries) to take full advantage of the tax deferral provided by the IRA.

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Business and tax pundits and reporters have made a lot of noise about the April 2005 U.S. Supreme Court decision in Rousey v. Jacoway. Unfortunately, much of this noise is inaccurate and incomplete, and has erroneously given IRA owners the impression that the account is completely creditor proof.

The Rousey decision unanimously decided that an IRA can qualify for exemption in bankruptcy under federal law to the extent "reasonably necessary for the support of the debtor." This has been trumpeted as an exciting new and comprehensive protection' In fact, previous cases in this area had already been decided favorably to the IRA owner, so Rousey broke no significant new ground here in Michigan. Further, the "reasonably necessary" language has commonly been interpreted quite narrowly (as subsistence), so other avenues for protection are advisable for Michigan IRA owners, particularly for accounts with significant balances. Michigan provides state law, which is more useful than the federal law, cited in Rousey for most individuals.

Protecting retirement assets from creditor claims may be one of the most important considerations in planning for retirement. An adverse effect of the (misplaced) prominence given the Rousey decision is the false impression that casual readers may take away that asset protection is a "silver bullet" game, in which use of a particular "commodity" technique renders a debtor judgment-proof. In reality, asset protection, like estate planning, generally requires a review of the facts in each individual situation, with a particular emphasis on the types of assets and forms of ownership, in order to implement and carry out an appropriate plan for limiting exposure to creditors. No technique is foolproof, and no technique by itself can render an individual immune from creditors.

Another important aspect of IRA ownership is the income-deferral offered in the account. IRAs, unlike most qualified plan accounts (such as profit sharing or 401(k) accounts) can be paid out over long periods based on the life expectancy of the beneficiary. The Internal Revenue Service in March of 2003 gave final rules which allow IRAs to use "stretch" payment features. IRAs can be paid-out in a post death setting using "life expectancy" tables. Payments can now be made, post death, over a period of up to 84 years. On the other hand, a timely, before-the-fact analysis, can materially reduce, and in many cases eliminate, the exposure of assets to potential creditor claims. A properly established IRA account can be an important part of this planning process, along with other techniques appropriate to the particular facts of the situation, such as the use of limited liability companies, spendthrift asset protection trusts, and life or increased liability insurance.

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In Michigan, effective for 2005, a new Income and Principal Act goes in affect allowing post death payments of a stretch IRA to be taxable to the beneficiary of the stretch trust. All of this, of course, adds to new options, planning ideas and confusion for the investor.

For more information on how to find the best solution for you and your family, contact us at [e-mail].