standalone retirement account

Myths About Standalone Retirement Accounts

I recently heard 2 myths related to standalone retirement trusts that we would like to clarify. But first, what is a standalone retirement trust (or SRT)? It is a special type of trust designed to be the beneficiary of your qualified retirement accounts like IRAs, 401(k)s, etc.

Since the SRT is named as the beneficiary of your retirement account, it will receive funds only once you have died, leaving you free to spend the money as you see fit until that time. Afterwards, the trustee that you have selected will then be in charge of withdrawing and managing the money received from the inherited retirement account according to your wishes in the trust document. 

Myth #1: Individual retirement accounts (IRAs) are fully exempt assets in bankruptcy.

Fact: The federal Bankruptcy Code protects up to $1 million of assets (adjusted for inflation every three years) held in IRAs. If you have a large sum of money in IRAs (both traditional and Roth IRAs), creditors may still take some of it. Inherited IRAs are typically not protected at all in bankruptcy.

Myth #2: My retirement plan is through my employer and is protected by ERISA (Employee Retirement Income Security Act of 1974).

Fact: Just because your retirement funds are held in an account by your employer does not automatically mean that the plan is an ERISA-covered plan account. For example, IRA-based plans like SEP (simplified employee pension) and SIMPLE (savings incentive match plan for employees) IRAs do not receive ERISA protection.

I hope this information is helpful to you as you plan for your family’s future. Because retirement accounts are often one of the most valuable accounts that people own, ensuring that these special accounts are protected for your loved ones and beneficiaries is essential. Reach out to me if you need help creating a trust that works for your unique situation.