IRAs, Creditors, and Multiple Accounts

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Question:  I wonder if I read a recent article of yours correctly.  It mentioned that there are states where a person’s IRA funds are protected from creditors.  Does this mean that someone might save a million dollars in an IRA and then be free to have as many unpaid bills as he liked because he knew he could always live comfortably on the IRA money?

Answer:  Actually, the focus of that column was on a new Supreme Court ruling that opened inherited IRA accounts up to creditors in a bankruptcy.  This is because inherited IRAs do not have the same retirement account attributes as Traditional or Roth IRAs; meaning, inherited IRAs are not protected from creditors in bankruptcy except in the seven states (Alaska, Arizona, Florida, Ohio, Missouri, North Carolina, and Texas) that specifically protect beneficiaries of inherited IRAs.  In all 50 States federal bankruptcy law protects up to approximately $1.25 million of retirement account funds, including regular and Roth IRAs.

So yes, one can have a million dollar IRA and declare bankruptcy.  There may be a few unscrupulous scofflaws around that choose to do this on purpose, but in my experience no one would intentionally choose to not be able to pay their bills and then suffer through the misery and aftermath of a bankruptcy. 

Question: After reading your rollover article today in the Herald, I started thinking about my IRA.  I started out with a 403B account with Fidelity, and after I retired I eventually rolled it over to an IRA with Fidelity.  After managing this account for thirty years myself, this year I decided to turn over the management to them,  only keeping two of my only individual stocks, Google and Apple, "to play with."  This situation created two new account numbers at Fidelity, plus my old one which has zero in it.  Now I am considering taking about half of the money which I gave them to manage in a balanced 50/50 portfolio and putting that in a new Fidelity/Blackrock managed fund which will create another IRA account number with Fidelity.  Is there any problem with having all these account numbers in one firm...all the same IRA money....and all I am really doing is transferring within the same firm?

Answer: It is not uncommon to have multiple IRA accounts in custody at the same firm or even with different firms.  You can think of it this way:  Every individual is entitled to one IRA, but that one IRA can be split into as many separate investment accounts as you want.  When you calculate your Required Minimum Distribution (RMD) after turning age 70 ½, you can calculate and take an RMD from each account, or you can figure out the total RMD based on the combined value of your IRA accounts, and take the RMD from whichever account or accounts you would like.

Under new rules starting next year, similar thinking applies to borrowing money from your IRAs.  No matter how many separate accounts you have, you can only borrow once in a twelve month period because the reality is that even if you have multiple accounts, you only have one IRA.  I hope that makes sense and answers your question.

Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment manager and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning.  Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to ken@montereypw.com.