A recent court ruling could affect those with inherited IRAs.
In the 2014 bankruptcy court case Clark v. Rameker, 573 U.S.
, the debtor was a non-spousal beneficiary of an IRA valued at approximately $450,000 and found herself in the position of declaring bankruptcy, while still holding a sizeable percentage of her IRA inheritance. Given the protected status of an IRA, this case made its way through the court system all the way to the Supreme Court, where the final ruling was handed down.
The Court ruled the inherited IRA could be included in the bankruptcy estate. They found there were meaningful contrasts between the inherited IRA and traditional or Roth IRAs:
The holder of an inherited IRA may never invest additional money in the account
Holders of inherited IRAs are required to withdraw money from such accounts, no matter how many years they may be from retirement
The holder of an inherited IRA may withdraw the entire balance of the account at any time – and for any purpose – without penalty
From the Court determination, in order to be exempt, funds must truly be retirement funds and
they must be held in a “covered account.” These are two conditions that must be met to still fall under the criteria of an IRA and its protections. For anyone in a debt situation where bankruptcy is a strong consideration, it is important to realize it is possible for any IRA inheritance to be included in the bankruptcy proceedings. This is especially vital for any individual using an inherited IRA as their primary source of income.
This ruling drives home the importance of mindful financial planning through all stages of life as well as seeking the guidance of qualified third parties to explore and understand all the options.