Parents' IRA questions

[FI by 2024]

My parents have never had retirement accounts, but are considering opening them now at the ripe old ages of 65 and 76. They are considering IRAs because they may have to declare bankruptcy within the next year, and their lawyer has told them any money in an IRA would be protected. A bankruptcy is looking less and less likely (thankfully!) but just in case...

A few questions:

1) Which would be better, traditional or Roth? I'm leaning towards recommending a tIRA so they get the tax break now while still making an income. Thoughts?
2) Could they start penalty-free withdrawals immediately? I think I'm seeing that tIRAs would allow immediate withdrawals, but they may have to wait 5 years for Roth. Is that correct?
2a) If they go with a Roth, could they withdraw contributions immediately, just not earnings?
3) Is an IRA really "safe" during bankruptcy proceedings? Any "gotchas" they need to know about?

Thanks in advance!


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[rodi]

Do they have earned income? You can't contribute to an IRA or Roth unless you have earned income.

 

[FI by 2024]

They do this year. The plan is to retire in December, although knowing my dad that's probably not going to happen. So they can make contributions for 2015 at a minimum.


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[rodi]

I'm also not sure about the 76yo... since after age 70.5 there are RMDs... so you get less of a shelter.

 

[kaneohe]

..............................

1) Which would be better, traditional or Roth? I'm leaning towards recommending a tIRA so they get the tax break now while still making an income. Thoughts?
2) Could they start penalty-free withdrawals immediately? I think I'm seeing that tIRAs would allow immediate withdrawals, but they may have to wait 5 years for Roth. Is that correct?
2a) If they go with a Roth, could they withdraw contributions immediately, just not earnings?
3) Is an IRA really "safe" during bankruptcy proceedings? Any "gotchas" they need to know about?

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1) cannot open TIRA if >70.5 y.o. As rodi said, they need earned income for at least one parent to support IRA/spousal IRA
2) penalty-free w/d > 59.5 y.o. for TIRA.
2a) as you say, contributions can be w/d at any time; oldest Roth must be 5 yrs old before can w/d earnings w/o being taxed....no penalty since > 59.5 y.o.(since no Roth yet,must wait 5 yrs)
3) depends on state law

 

[hnzw_rui]

To be honest, I don't think an IRA will really do much good considering they can shelter, what, all of $13,000 combined?

401k has better protection in pretty much all states. Higher contribution limit, too.

 

[FI by 2024]

hnzw_rui,

They are self employed, very small business (only 1 other employee) so I don't think a 401k is an option. Maybe a SEP IRA? Anything else I'm not thinking of?


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[FI by 2024]

Thanks rodi and Kaneohe!


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[hnzw_rui]

They are self employed, very small business (only 1 other employee) so I don't think a 401k is an option. Maybe a SEP IRA? Anything else I'm not thinking of?

In that case, yes, go SEP IRA. That has a much higher contribution limit so they'll be able to shelter more funds.

 

[Animorph]

hnzw_rui,

They are self employed, very small business (only 1 other employee) so I don't think a 401k is an option. Maybe a SEP IRA? Anything else I'm not thinking of?


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If they didn't have that employee an individual 401k would be an option. Fairly easy to set up (such as Vanguard and Fidelity) and higher contributions than IRA.