Bankruptcy Protection for your IRA

By August 28, 2009 Individuals

If you are forced to file bankruptcy there are certain assets your creditors cannot normally touch.  Typically, your IRA is one of those protected assets.  It may now be necessary ensure bankruptcy protection for your IRA.

A district court has recently decided that you can lose that bankruptcy exemption if you misuse your IRA.  Although creditors cannot typically grab IRA funds, that rule does not apply if engages in a prohibited transactions with the account. In this case, the owner of a self-directed IRA borrowed money from it and used the account to pay off a mortgage casino online on property that he wanted. His self-dealing with the account nullified the bankruptcy exemption (Willis, D. C., Fla.).

The IRS did not come after this individual for back taxes on the account after discovering the prohibited transactions.  In fact, the IRS has typically been lenient when it comes to IRA mistakes, especially if they are unintentional.  Don’t expect your creditors to be as nice.