Inherited IRAs and Bankruptcy

Posted on July 18, 2014 at 9:18am by

What happens to an “inherited IRA” in bankruptcy? Is this asset exempt or protected from creditors like other seemingly similar “retirement funds?” Or will it be liquidated and used towards paying debts? The Supreme Court recently issued a ruling on this very issue.

What is an Inherited IRA?

Simply put, an inherited IRA is an IRA acquired by the beneficiary of a deceased IRA owner.

What Did the Supreme Court say about Inherited IRAs in Bankruptcy?

Last month the Supreme Court rendered a decision regarding the protection of inherited IRAs from attachment by creditors. Many people name their spouse or children as beneficiaries of their IRA, which, in theory, eases the transferability of the asset on death.B However, in Clark v. Rameker, the High Court rendered a decision that these assets are not protected under the US Bankruptcy Code as “retirement funds.”

Writing a unanimous decision, Justice Sotomayor found that inherited IRAs are different from traditional IRAs in a number of ways, including the following:

  • The owner of an inherited IRA can withdraw funds for any purpose without penalty regardless of age;
  • Minimum distributions are required for inherited IRAs regardless of the ownerbs age; and
  • The owner can never add funds to an inherited IRA

The fact that inherited IRA may be used to fund its owner’s retirement was not enough for the Court to extend the retirement fund protection afforded in bankruptcy. To determine how to protect an IRA from attachment post-mortem, consult an estate planning attorney. To determine whether an inherited IRA is exempted or protected from attachment in bankruptcy, call the experienced attorneys at The Sader Law Firm. We help clients in Missouri and Kansas understand their bankruptcy rights.

– Tracy Wrisinger