Retirement Funding for the 21st Century

Previously we were discussing the IRA and its progeny as part of a disciplined, sometimes tax-advantaged overall retirement plan, primarily geared toward the individual investor. We stressed the importance of engaging the professional services of a financial adviser while in the process of making key long-range financial choices, so as to determine which course is the most suitable, based upon such factors as a person’s age, income, time horizon, budget, tolerances, level of sophistication, expectation and anticipated future needs. This area of finance can be fairly complex. Also, it is especially important to seek tax or legal advice in matters regarding retirement and estate planning that are subject to ongoing interpretation of the tax code and legal statutes to ensure that one’s ultimate strategy remains relevant and viable according to the most current law. Just how essential it is to obtain such expert advice—as we continue to live in these interesting times—can be found in at least three contemporary illustrations that highlight the necessity for maintaining specialized oversight of retirement accounts.

The first significant case in point is the decision of the U.S. Supreme Court in Clark v. Rameker, 573 U.S. _____, 2014, handed down June 12, 2014, relating to inherited IRA accounts. The court ruled that, once passed on to an heir other than a surviving spouse, the account can no longer be characterized as a retirement account, but rather, becomes merely an asset subject to the claims of creditors. Justice Sonia Sotomayor, writing for a unanimous court, found there is no protection in federal bankruptcy to the recipient of an inherited IRA account, as there would be for the original owner/prospective retiree. Since the intent of the IRA is to protect the essential needs of the original owner upon retirement, i.e., when he or she stops working, the account remains exempt from creditor claims under the federal Bankruptcy Code. But once ownership of the account passes into the hands of the heir, no further investment in the account is permitted. Furthermore, the heir is required to take distributions from this account, irrespective of any purported retirement age. And indeed, the new holder of this account may withdraw from it any sum at any time for any purpose without penalty, removing all doubt that it might still be defined as a retirement account rather than simply a type of investment asset.