Ohio residents may be aware that funds saved for retirement are protected when an individual files for a bankruptcy. However, the rules regarding monies in an inherited retirement account have been less clear. This ambiguity was addressed by the Supreme Court of the United States on June 12. The court ruled unanimously that money in an inherited retirement account was not protected in bankruptcy proceedings, and it could be used to pay creditors.

Retirement income is exempted to allow those seeking bankruptcy to still have money available to meet their living expenses after they stop working. Monies in an IRA account are generally accumulated over an individual’s working life, and significant penalties are assessed if money is withdrawn by the account holder when they are younger than 59 years old.

However, these rules do not apply to money in an IRA account that has been inherited. Justice Sonia Sotomayor noted that funds in inherited IRA accounts must be withdrawn annually, and the court held that such monies represented current rather than future income. The case was heard after a 35-year-old woman appealed a bankruptcy court decision that her inherited IRA was unprotected. The justices heard that the woman had withdrawn $150,000 from the account since inheriting it in 2001.

The bankruptcy laws are designed to offer those with unmanageable debt an opportunity for a financial fresh start. However, they are not a means for individuals to escape their financial obligations when they have the ability to meet them. A bankruptcy attorney could explain to those facing financial difficulties the different debt relief options available. The attorney may also suggest a strategy that could put an end to creditor harassment while protecting assets such as a primary residence or retirement account.

Source: NPR, “Supreme Court: Inherited IRAs Not Protected From Bankruptcy“, Nina Totenberg and Rebecca Buckwalter-Poza, June 12, 2014