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Inherited IRAs and Bankruptcy


Retirement accounts are typically exempt from bankruptcy. This means that if you have money saved in a retirement account, such as a 401(k) account, a bankruptcy trustee can not utilize any of those monies in order to repay your debts. This is important to remember because your retirement accounts are essentially safe and secure and insulated from the bankruptcy process. However, the Supreme Court of the United States recently determined that one particular type of retirement account actually is not entitled to any type of bankruptcy protection: the inherited individual retirement account (IRA). Learn more about your rights regarding inherited IRAs and the bankruptcy process.

Retirement Plans and Bankruptcy

The reason that courts made the decision not to allow retirement plans to be accessed as funds to repay creditors in the bankruptcy process, is that in many cases a debtor would lose their entire life savings. Retirement plans have always received special protection under the law. For example, participants in these employee benefit plans typically have money for future retirement planning through their pre-tax income. Additionally, where those retirement plans are not sponsored through an employer, participants still receive several benefits regarding tax exemptions for money placed into a retirement plan.  Legislators wanted to ensure that participants in retirement plans would continue to receive these protections even if they declare bankruptcy.

Inherited IRAs

An inherited IRA is one in which a person receives the retirement benefits of someone who has recently passed away. There are very specific rules that relate to this type of inherited IRA and bankruptcy.

  • If the Inheritor is Not the Spouse

There are two options regarding bankruptcy and the inherited IRA. In this case, the person inheriting the IRA is not the actual spouse, but rather the person declaring bankruptcy, then the inheritor can not add money to the IRA, and would not receive a penalty for withdrawing money early from the inherited IRA. Additionally, the law states that the inheritor MUST withdraw the retirement account money. Therefore, the court determined that because the originator of the inherited IRA account died, and the account is transferred to another person, it is not technically a retirement account anymore, but rather more of an asset account. Therefore, because it is an asset account and not a retirement account, it can be considered assets for the purpose of bankruptcy.

  • If the Inheritor is the Spouse

However, if the person that inherits the IRA is the spouse of the person declaring bankruptcy, then there are other options. If this is the case, then the person can roll the inherited IRA into their own individual IRA, which preserves the retirement exemption within a bankruptcy. It is important to note that the money is now in a retirement account, and can not be accessed except under the rules that exist for retirement plans.

Let Us Help You Today

Contact an experienced West Palm Beach bankruptcy attorney at Kelley Kaplan & Eller at 561-264-6850 today for a consultation, and to help understand your legal rights if you have a situation with an inherited IRA.




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