U.S. Supreme Court rules on inherited IRAs and bankruptcy

With the U.S. fast becoming home to an aging population, many Mississippians are likely wondering how to deal with financial situations involving debt, bankruptcy and inheritance. Recently, the U.S. Supreme Court issued a unanimous verdict on the subject of Individual Retirement Accounts and personal bankruptcy.

The case is known as Clark v. Rameker, and the Supreme Court's ruling on it could affect many Americans' retirement plans. In 2001, a woman inherited an IRA from one of her parents. The woman started the process of taking monthly distributions from the IRA, which was worth about $450,000 at the time. In 2010 the woman filed for bankruptcy, and she found that creditors were eager to gain access to the IRA in order to fulfill their settlement goals.

The woman argued that the IRA's funds should be inaccessible to creditors because the bankruptcy code features an exemption for retirement assets. The bankruptcy court, however, disagreed and argued that because the IRA was inherited, its funds were not proper retirement assets. The woman appealed to a U.S. District Court, which ultimately disagreed with her, as did the U.S. Supreme Court. The Supreme Court noted that retirement assets are those that are put aside for when a man or woman stops working. The court argued that an inherited IRA failed to meet that basic definition.

The Supreme Court's decision noted that the tax code also distinguishes between IRAs and inherited IRAs. The first difference is that taxpayers put money into an IRA, whereas those who inherit one must usually start withdrawing funds within a year of inheriting it. The second difference is that original holders of IRAs face a penalty if they take out money before hitting a certain age, while those who inherit IRAs are free from such a penalty.

Interestingly, if a spouse inherits an IRA from another spouse, it may be possible for the inheriting spouse to re-characterize the fund as their own account. In doing so, that same IRA could then be exempt from bankruptcy.

Whether one is looking into Chapter 7 bankruptcy or Chapter 13 bankruptcy for debt relief, there are a host of considerations when it comes to retirement accounts. Obtaining thorough and up-to-date information from a Mississippi bankruptcy attorney is one way to ensure filing for bankruptcy goes hand-in-hand with a more solid financial future.

Source: Employee Benefit News, "Supreme Court: Inherited IRAs subject to bankruptcy claims," Richard F. Stolz, June 18, 2014

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