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July 2011
You Can Damage Your IRA’s Protection
By Gary Smith

You Can Damage Your IRA’s Protection

     A United States Court of Appeals has ruled that a person’s individual retirement accounts (IRAs) were not exempt from creditors. The owner of the IRAs had entered into a “prohibited transaction” with his IRAs which caused the IRAs to be disqualified. This means that the IRAs are treated as being distributed to the owner on the first day of the tax year when the prohibited transaction occurred, with all of the taxes and penalties due as if the owner had withdrawn the money.

     What qualifies as a “prohibited transaction” is defined by statute, and, in general, covers situations where individuals use the funds in their IRA for their own or an affiliate’s or relative’s benefit (these people fall under the definition of a “disqualified person”).

     In this case, the owner of the IRA had his funds transferred to a bank account in his and his wife’s name to cover a purchase of a mortgage. He repaid the amounts to his IRA within a year. He later used funds in the IRA to cover losses in his brokerage account and transferred funds back and forth multiple times from each account to the other. The owner of the IRAs then filed bankruptcy and claimed the IRAs were exempt from creditors.

     The court ruled that the IRA owner’s actions violated the prohibited transaction rules. Thus, the owner’s creditors in bankruptcy had access to his IRA accounts.

     It is important to take the rules pertaining to 401(k)s and IRAs very seriously. Do not access this money for you or your business’ benefit unless you intend it as a true withdrawal where you will pay tax (and penalties, if applicable).

     Also, if you are considering withdrawing money from your 401(k) or IRA account before you had planned to in order to survive, you should consider bankruptcy as an option before you spend your protected retirement savings.




That Laptop May Be Monitoring You!

     Built-in webcams are becoming more and more common in computers these days, and in turn, they are becoming more and more of a liability. One couple is now accusing national rent-to-own chain Aaron’s Inc. of spying on them at home using their rented computer’s webcam without their knowledge. Aaron’s also allegedly used a keylogger and took regular screenshots of the couple’s activities on the machine, leading the couple to sue and seek class-action status against the entire chain in North America.

     According to the complaint, Aaron’s has been using an undetectable product on its rent-to-own machines since at least 2007 in order to “surreptitiously access, monitor, intercept, and/or transmit electronic communications” made by Aaron’s customers, and lock out customers who fail to pay.

     Crystal and Brian Byrd found this out the hard way when they rented a Dell laptop from Aaron’s, which they paid off in full—one month ahead of schedule. Aaron’s didn’t record the last payment correctly, however, leading an Aaron’s store manager to show up at the Byrd home to repossess the computer. The store manager then produced a photo of Brian Byrd using the machine taken with the webcam as apparent proof that the Byrds were still using the computer.

     The Byrds were so upset they immediately called the police, and an investigation later revealed that Aaron’s “routinely installed” the monitoring agent on all of their rent-to-own computers. Law enforcement confirmed that the product indeed permitted the company to take webcam photos, screenshots, and log the keystrokes of its customers without their knowledge or consent.

     It’s unclear how many other photos Aaron’s might have collected on the family, but Brian Byrd was concerned. “Crystal gets online before she gets a shower and checks her grades. Who knows? They could print that stuff off there and take it home with them. I’ve got a 5-year-old boy who runs around all day and sometimes he gets out of the tub running around for 20, 30 seconds while we’re on the computer. What if they took a picture of that?”

     The Byrds’ situation is reminiscent of an earlier one that was settled involving the Lower Merion School District in Pennsylvania where some parents discovered that the school district had used remote software to activate the built-in webcams on the students’ school-issued computers in order to check up on them at home, while the district insisted that its “spying” policy only applied to laptops that were reported stolen.

     The Byrds laptop is still in police custody, and the retail chain has stated that it has not authorized the use of any monitoring software or devices by any of its stores.

     Given the fact that Aaron’s has more than 1,500 stores, if the suit is certified as a class action, there are bound to be other customers who discover that they don’t have as much privacy at home as they thought.

     Content contributed by Wishart, Norris, Henninger & Pittman, P.A., which partners with owners of closely-held businesses to provide comprehensive legal services in all areas of business, tax, estate planning, succession planning, purchases and sales of businesses, real estate, family law, and litigation. For more information, contact Gary Smith at 704-364-0010 or visit

Gary Smith is an attorney at Wishart, Norris, Henninger, P.A.
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