In most cases, creditors shy away when they hear the words “individual retirement account.” After all, an IRA is automatically protected during a bankruptcy proceeding, right? Not so fast. There are some situations in which your Washington IRA may not be as safe as you think.
There is an important distinction between an IRA that you have yourself funded — as opposed to one that you have inherited. A recent Supreme Court decision has determined that an IRA that has been handed down through an estate plan is not eligible for use by the beneficiary. That is, the beneficiary must remove all of the assets from that IRA within a five-year period.
In the case considered by the Supreme Court, a woman and her husband declared bankruptcy during that five-year span. The woman had recently received an inheritance of $300,000 after her mother passed away. The couple was attempting to argue that the IRA funds should have been protected from creditors because of the nature of the account. The nation’s courts have disagreed.
The purpose of protecting an IRA from creditors is to provide citizens with some measure of protection during their later years. Inherited IRAs, however, are considered income and may be used immediately. IRAs that are funded by the person filing for bankruptcy cannot have money withdrawn before age 59 1/2 without some type of penalty.
If you are considering filing for bankruptcy, but you are not sure whether your assets would be safe from creditor claims, it makes sense to check with a qualified professional. In some cases, you may be able to hold on to far more than you thought! It is imperative that you understand which assets can be claimed by creditors, however, through state exemptions and federal exemptions.
Source: Courthouse News Service, “Inherited IRAs Aren’t Creditor-Safe, Court Says” Barbara Leonard, Jun. 12, 2014