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Does your IRA have SIPC protection?

IRAs generally come in three flavors, annuities, trust accounts, and custodial accounts. SIPC rules clearly state that trust accounts are eligible for SIPC protection. But those rules, which you can find here, don’t specifically mention custodial accounts. Since custodial accounts aren’t trust accounts, we asked the SIPC to explain their position. The following is their response:

“Dear Mr. Cardinale:

The protection to be afforded by SIPC in any particular case involves questions of law and fact, which would be influenced by the applicable Internal Revenue Code provisions, local laws governing trusts, and interpretations of the particular instruments.

Pursuant to Internal Revenue Code Section 408(a), the term ‘individual retirement account’ means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets the requirements set forth in Section 408.

Although we have never litigated the protections afforded an IRA account holder in a SIPC liquidation, since 1982, SIPC’s position has been that a custodial account treated as a trust under Section 408 would also be considered a qualifying trust under SIPC Rule 104.

Assuming a customer account at a SIPC member broker is properly created and qualifies for the beneficial tax treatment under the applicable provisions of Section 408, it will also qualify for the protection afforded a separate customer under SIPC’s Rule 104(b).

Thus, the term ‘custodial account’ versus ‘trust account’ should make no difference as long as the trust is properly created pursuant to Internal Revenue Code Section 408.”

There you have it. The SIPC says custodial IRA accounts are covered. But we’d feel more comfortable seeing that stated explicitly in their rules.

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