IRAs Exempt From Bankruptcy Creditors, High Court Rules
The U.S. Supreme Court ruled last week that Individual Retirement Accounts (IRAs) cannot be reached by bankruptcy creditors.
Based on this ruling, creditors, such as multifamily housing managers, builders, remodelers or any housing industry entity that is owed money and has filed a claim in bankruptcy court, will not be able to receive the proceeds from the debtor’s IRA (unless the debtor is 59-1/2 or older) because these retirement accounts are now entitled to an exemption from the bankruptcy estate.
In the case of Rousey v. Jacoway, the Supreme Court held that IRA assets fall under an exemption for pensions and similar plans and contracts that confer a right to payment based on age. The April 4 ruling was unanimous.
The petitioners in this case, Richard and Betty Jo Rousey, took lump sum distributions from their employer-sponsored pension plans and deposited them into separate IRA accounts. The couple subsequently filed jointly for chapter 7 bankruptcy protection and claimed an exemption for their IRAs.
The bankruptcy trustee objected to their claimed exemption, and both the bankruptcy court and the Eighth Circuit Court of Appeals upheld the trustee’s objection. Both courts ruled that the IRA accounts were available to the Rouseys at any time (albeit with a 10% withdrawal penalty prior to age 59-1/2) and therefore did not fall under the exemption for plans conferring a right to receive “on account of age.”
The United States Supreme Court disagreed and reversed the lower court ruling, finding that the 10% penalty was a substantial impairment to the Rouseys’ right to payment.
Since this impairment would be removed when the account holders turned 59-1/2, the Supreme Court held that the IRA accounts did qualify for the exemption from the bankruptcy estate as a plan conferring a right to payment “on account of age.”