Tennessee laws regulate the taxation, division and seizure of individual retirement account (IRA) funds among its residents. Unlike other assets, such as cash accounts, property and income, state and federal laws do not consider retirement funds as assets. Instead, money inside a qualified IRA receives special exemptions from taxation, garnishment and seizure.
According to the Tennessee Department of Revenue, the state does not tax distributions from IRAs, regardless of the type of IRA a resident takes distributions from. Furthermore, state income taxes do not apply to federally exempt income derived from stocks and bonds you own within an IRA, or other pension trust or profit-sharing trust.
According to Tennessee Code, Title 26, IRAs receive special protections when account holders face a court-ordered wage and asset garnishment due to unpaid debts and liabilities. With the exception of the IRS and the State of Tennessee, creditors cannot garnish funds from tax-exempt IRAs in Tennessee, regardless of the value of the retirement account. However, regular withdrawals taken from an IRA during retirement have no state protections. Once the money leaves the tax-sheltered retirement account, a court can order garnishment of IRA distributions as income.
Prior to 2005, IRA vulnerability during a Tennessee bankruptcy was at the sole discretion of the state. However, when Bankruptcy Abuse Prevention and Consumer Protection Act became law in October of that year, IRAs received federal protection from liquidation during personal bankruptcy. Now, IRAs in all states receive protection for up to $1 million. However, the law applies the exemption to each bankruptcy filer, rather than to each retirement account. In other words, if you have multiple IRAs, you'll receive $1 million in total bankruptcy protection spread across all of your qualified retirement accounts.
Tennessee is an equitable distribution state, and as such considers money contributed to a retirement account during a marriage to be marital property. However, money contributed to a retirement account prior to marriage is not marital property, meaning the contributing spouse can retain all of the premarital contributions following a divorce. If you must divide your IRA with a spouse during divorce, you can either divide the divisible value of the account into two separate retirement accounts, or one spouse may buy out the other spouse by trading assets for an equitable share of the retirement funds.
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