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Supreme Court Bankruptcy Ruling Has Implications For Inherited IRAS
In a new case, the U.S. Supreme Court ruled that inherited IRAs are not retirement assets that are protected from creditors in bankruptcy.
Bankruptcy cases do not often make it to the highest court in the land. Nonetheless, on June 12, the U.S. Supreme Court handed down a decision that could affect you if you are trying to get out from under debt through a bankruptcyfiling. The case concerned one of the most popular retirement savings vehicles, the individual retirement account.
Retirement assets protected from creditors in bankruptcy, but not inherited IRAs
IRAs are tax-advantaged accounts that can grow substantially over time. Beyond the tax savings, IRAs have another huge advantage in that the funds in an individual's IRA are protected from creditors in the bankruptcy process. In a piece of legislation known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Congress extended the creditor shield in bankruptcy that had long been available for employer-sponsored 401(k)s and other types of retirement plans to cover IRAs as well.
However, to make withdrawals from a traditional IRA without facing tax penalties, an accountholder generally must wait until after the age of 59 and a half, and in order to ensure that an IRA does not run dry prematurely, experts typically recommend withdrawing no more than four percent of the account balance annually. The combination of these factors means that when the owner of an IRA dies, there is often a remaining balance in the account that is inheritable by his or her heirs.
In the recent Supreme Court case, a married couple filed for bankruptcy after inheriting a substantial sum in an IRA from the wife's mother. The couple's creditors tried to get at the contents of the IRA, but the law was unclear as to whether inherited IRAs could be protected in bankruptcy in the same way they can be shielded from creditors by the original accountholder. After a series of appeals, the case came to Supreme Court.
In a unanimous decision, the Supreme Court ruled that inherited IRAs cannot be considered retirement funds and thus are not protected from creditors inbankruptcy. The Court reasoned that the recipient of an inherited IRA cannot delay distributions until retirement and cannot make additional investments into the IRA, and therefore, an inherited IRA is not a retirement asset of the kind lawmakers meant to protect in bankruptcy.
There is one notable exception. An IRA inherited from a spouse can be considered a retirement fund and is shielded from creditors in bankruptcy.
A bankruptcy lawyer can help you structure assets most advantageously
If you are in trouble with debt, a bankruptcy filing can help you get your financial life back on track. The new Supreme Court ruling does unequivocally remove one type of asset from the list of those shielded from creditors. But even if you have funds from an inherited IRA, a skilled bankruptcy attorney may be able to help you structure your assets to better take advantage of available bankruptcy exemptions. Talk to a bankruptcy lawyer today to learn more about what bankruptcy could do for you.
At Illini Legal Services, we offer a free, no-obligation consultation to each of our clients. During your consultation, we will take the time to listen to your financial concerns and assess your case and individual situation. We have five locations to serve you. Contact us today for help!
Illini Legal Services is engaged in the private practice of law and is not a public legal aid agency. We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.