U.S. SUPREME COURT RULES INHERITED IRAS AREN’T PROTECTED
Because of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Act), it’s become more
difficult for consumers to discharge certain debt obligations by filing for bankruptcy. While some provisions of
the Act restrict the debtor’s options in bankruptcy, the legislation does provide limited protection for assets in
certain savings arrangements, including Traditional and Roth IRAs, Simplified Employee Pension (SEP) plans,
and Savings Incentive Match Plan for Employees (SIMPLE) IRAs.
Under the Act, Rollover, SEP, and SIMPLE IRAs are totally protected from creditors. The following are various
Traditional and Roth IRA assets may be exempted from a debtor’s bankruptcy estate up to a limit of
SEP and SIMPLE IRA plan assets are not subject to the $1 million limitation (unlimited asset protection).
Assets rolled into IRAs from employer-sponsored retirement plans, including SEP and SIMPLE IRAs, are
totally exempt from creditors.
Inherited IRAs Not Protected
Unlike the IRAs noted above, an IRA that is inherited by a beneficiary after the death of the owner is not
subject to the same protection. The following is an excerpt from Case No. 13-299, Clark v. Rameker, argued
March 24, 2014 – decided June 12, 2014.
In October 2010, Ms. Heffron-Clark and her husband, Brandon Clark, filed a Chapter 7 bankruptcy petition.
They identified an inherited IRA, by then worth roughly $300,000, as exempt from the bankruptcy estate.
Heffron-Clark argued that an inherited IRA is still technically a retirement fund because that’s the way it was
originally set up.
The Bankruptcy Court disagreed and concluded that an inherited IRA does not share the same characteristics
as a traditional IRA and disallowed the exemption.
The District Court reversed the decision, explaining that the exemption covers any account in which the funds
were originally accumulated for retirement purposes.
The Supreme Court took up the case, reversed the District Court’s decision, and resolved the split on the issue
among federal appeals courts.
Opinion of the Court
When an individual files for bankruptcy, he or she may exempt particular categories of assets from the
bankruptcy estate. One such category includes certain “retirement funds." The question presented is
whether funds contained in an inherited individual retirement account (IRA) qualify as “retirement funds"
within the meaning of this bankruptcy exemption. The Court determined that they do not.
When an individual debtor files a bankruptcy petition, his or her “legal or equitable interests in property"
become part of the bankruptcy estate. “To help the debtor obtain a fresh start," however, the Bankruptcy Code
allows debtors to exempt from the estate limited interests in certain kinds of property. The exemption at issue
in this case allows debtors to protect “retirement funds to the extent those funds are in a fund or account that
is exempt from taxation under Section 401, 403, 408, 408A, 414, 457, OR 501(a) of the Internal Revenue Code."
The enumerated sections of the Internal Revenue Code cover many types of accounts, three of which are
relevant here. The first two are traditional and Roth IRAs in which both types of accounts offer tax advantages
to encourage individuals to save for retirement. Legislation does provide limited protection under federal
bankruptcy laws to these accounts.
The third type of account relevant here is an inherited IRA. An inherited IRA is a traditional or Roth IRA that has
been inherited after its owner’s death. It can also be established by beneficiaries of participants in employer-
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