Supreme Court: Inherited IRAs Not Protected From Bankruptcy

The Supreme Court has ruled that individual retirement accounts (IRAs) that Americans inherit are not protected in bankruptcy proceedings.

When Heidi Heffron-Clark declared bankruptcy in October 2010, she and her husband claimed the IRA she inherited from her mother — then worth $300,000 — qualified as “retirement funds,” meaning the couple could not be required to use it to pay debts they owed creditors.

But an inherited IRA differs in big ways from the type of IRA someone builds over the course of a working lifetime.

Heffron-Clark, now 35, never contributed to the IRA; she had already drawn $150,000 in monthly payouts from the account since her mother’s death in 2001. She could also withdraw the entire amount of the IRA any time, without penalty. The bankruptcy court ruled against Heffron-Clark, declaring that an inherited IRA represented “an opportunity for current consumption, not a fund of retirement savings.” The Supreme Court agreed unanimously.

Writing for the nine, Justice Sonia Sotomayor said that “‘retirement funds’ is … properly understood to mean sums of money set aside for the day an individual stops working.”

The point of exempting retirement funds from bankruptcy, wrote Sotomayor, is to ensure that those who declare bankruptcy can still “meet their basic needs during their retirement years.” Indeed, an original IRA account holder may not withdraw funds before age 59 without paying a steep penalty. In contrast, an inherited IRA is treated in exactly the opposite way, with withdrawals mandated annually.

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Read original article – Published June 12, 2014 7:54 PM ET
Supreme Court: Inherited IRAs Not Protected From Bankruptcy

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