Supreme Court rules inherited IRAs are exposed in bankruptcy

On Behalf of | Jun 16, 2014 | Bankruptcy |

Retirement is something we build for ourselves. Gone for the most part are the days when a person became vested in a company pension plan. As such, the funds that are put into individual retirement accounts or an employer-sponsored plan like a 401(k) or 403(b) are considered shielded from creditors if a person’s circumstances lead them to decide to file for bankruptcy to get back on the road to financial health.

But according to a recent decision by the U.S. Supreme Court, that blanket doesn’t apply to all IRA account funds. If the money is in an inherited IRA, the shield may no longer exist and creditors may seek to lay claim to the funds if an heir subsequently files for bankruptcy.

The test case that yielded this ruling came out of a state other than Texas, but because it reached the high court in Washington, it has national implications.

It involved a woman in Wisconsin who inherited an IRA from her mother in 2001 that was worth a bit more than $450,000. The woman hit some hard times and drew from the IRA funds. In 2010, she filed for bankruptcy and when creditors sought to tap the $300,000 remaining in the IRA, the woman argued it should be viewed as protected retirement money.

The bankruptcy court ruled for the creditors, but an appeals court reversed the decision. The next court up upheld the original decision and when the Supreme Court took up the matter, the justices ruled unanimously that the inherited IRA was not subject to protection because the heir can’t put money into the inherited fund and can withdraw from it at any time — conditions that don’t exist for original owners of IRAs.

That does not mean that there aren’t possible strategies for protecting inherited IRA money. Those wondering what steps should be taken should always consult with professionals with experience in this area of law and finance.

Source: Forbes, “Supreme Court Finds Inherited IRAs Not Protected In Bankruptcy,” Deborah L. Jacobs, June 12, 2014