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Supreme Court Rules that Inherited IRAs are Not Protected From Bankruptcy Proceedings

Published on June 24, 2014

, wherein a woman who’d inherited her mother’s IRA had tried to shield the account from creditors, claiming the account qualified as retirement funds.

No go, according to the decision, written by Justice Sonia Sotomayor, who noted that that “‘retirement funds’ is … properly understood to mean sums of money set aside for the day an individual stops working.” She likened the inherited IRA to a checking account or envelope filled with money as a similar example of what could potentially be used for retirement but is not recognized as retirement funds for this purpose.

The woman who had declared bankruptcy in 2010 (Mrs. Clark) had already been drawing down funds from the inherited IRA. This was not her own IRA that she had been contributing to with the intention of using the money for her retirement years.

Therefore, the Court ruled this IRA did not qualify as retirement funds.  Section 522 of the Bankruptcy Code exempts tax-exempt retirement funds from the bankruptcy estate.

AN INHERITED IRA VS TRADITIONAL OR ROTH IRA

In Mrs. Clark’s case, the bankruptcy court ruled against her, declaring that an inherited IRA represented “an opportunity for current consumption, not a fund of retirement savings.” The Supreme Court agreed unanimously.

An inherited IRA differs in a few major ways from the Traditional or Roth IRAs that people contribute to over the course of their working lives. For example:

Justice Sotomayor pointed out that the reason retirement funds are exempted from bankruptcy is to ensure that those who declare bankruptcy can still “meet their basic needs during their retirement years.”

If you’ve inherited an IRA and you don’t need the money to meet your immediate financial needs, you may have the option to roll it over into your existing IRA (in the case of a spouse beneficiary) or you might be better served transferring the funds to a new custodian. The transaction specialists at Next Generation Trust Services can answer questions you might have about your inherited IRA and whether or not you can use those funds to open a new self-directed retirement account. We strongly recommend you consult your tax professional for guidance on how an inherited IRA may affect your tax and financial situation.

For self-directed IRA questions, contact us at Info@NextGenerationTrust.com or (888) 857-8058.

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