Supreme Court Rules that Inherited IRAs are Not Protected From Bankruptcy Proceedings
Published on June 24, 2014
If you’ve inherited an IRA, be aware that if you go into bankruptcy proceedings, that retirement account is not protected, and the funds may be used to pay debts owed to creditors. The US Supreme Court just ruled on this in Clark v. Rameker, 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:
- With an inherited IRA you can withdraw any amount or the whole amount in the account at any time without penalty. An original IRA account holder may not withdraw funds before age 59-1/2 without paying a steep penalty.
- Also, with an inherited IRA, withdrawals are mandated annually.
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.Back to Blog