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Inherited IRA

In a decision bound to have far reaching implications, the Supreme Court of the United States resolved a near decade-long split amongst circuit courts: Are inherited IRA funds protected in bankruptcy? In a unanimous decision the Court held (9-0) that such funds are not protected from the reach of creditors in bankruptcy. The Court's reasoned that there are several features that distinguish inherited IRA's from self-funded IRA's. Inheritors cannot contribute additional funds into the account and they can withdraw funds from their inherited IRA at any time without penalty. Leading the Court to conclude that, inherited IRA's do not receive the same protection from creditors as retirement assets receive in bankruptcy.

Despite the Supreme Court's decision, if state law allows the exemption, inherited IRA's are then exempted from the reach of creditors. Inherited IRA's are just not exempt under 522(b)(3)(c) of the bankruptcy code because of the retirement funds limitations. Thankfully, in 2011 Governor Scott signed into law a bill that overturns a previous court ruling which held that inherited IRA's looses its protection from garnishment of creditors. This law exempts inherited IRA's from creditor claims and applies retrospectively to all inherited IRA accounts.

However, there are guidelines which an IRA must satisfy in order to be claimed exempt from the reach of creditors. There are limitations as to how much is protected, and when the funds were deposited into the IRA. Due to the complexity of IRA's in bankruptcy, if you own an IRA and are considering filing for bankruptcy, be sure to consult with an attorney prior to filing.