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Are Inherited Retirement Plans Protected from Creditors in a Bankruptcy case?

  • By: Christopher Benson
  • Published: August 15, 2014

In June 2014, the U.S. Supreme Court handed down a landmark decision regarding bankruptcy law, which excludes inherited IRAs from bankruptcy protection.

Part of the confusion stemmed from the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, which made it more difficult to file for total bankruptcy. However, the 2005 Bankruptcy Act did offer protection from creditors for retirement funds in unlimited amounts, but didn’t state whose funds were exempt.

Eventually creditors began challenging the idea that inherited IRAs were “retirement funds” and not simply an “inheritance.” The argument was a tricky one, because other assets don’t change properties when inherited. If you inherit a house, car or piece of jewelry from a loved one, they are still the same after they change hands. But IRAs, they said, were different.

The Supreme Court agreed, saying that inherited IRAs were retirement accounts because the beneficiary cannot add money to the account, they have to take Required Minimum Distributions within a year of inheriting the account regardless of age, and beneficiaries can take out money and use funds from the account at any time with no penalties.

The new ruling applies to IRA beneficiaries other than spouses. IRAs inherited from a spouse are still protected from creditors under bankruptcy. States could write their own laws protecting inherited IRAs, but so far only seven states have acted to protect inherited IRAs.

If you have questions concerning Chapter 7 and Chapter 13 bankruptcy, please give us a call. We offer a free initial consultation. As an experienced bankruptcy lawyer, we can help you navigate the complex bankruptcy laws so that you comply with the requirements and assist with you getting a Fresh Start in your financial life.

Over the past 27 years, the Law Offices of Christopher A. Benson has helped over 2,300 of Washington clients take control of their financial situation. We can stop your garnishment and change your monthly payments for all your combined unsecured debt, and if you have had more than $600 garnished within the last 90 days, we can get all of the money back in most cases. But you have to act quickly–call (253) 815-6940 for your free consultation, or email us today. Evening and weekend appointments available.

Christopher Benson

About the Author Chris served on the Board of Directors for Habitat for Humanity
Seattle/S. King County for 10 years and served as Vice President
of the organization during part of that time. Read More