Supreme Court Rules That Creditors May Not Seize IRA Assets in Bankruptcy Proceedings
In a huge victory for managed and self-directed IRA owners everywhere, the U.S. Supreme Court ruled last week that IRAs receive Federal Creditor Protection. This means that creditors cannot seize assets in an Individual Retirement Account.
The Supreme Court ruled unanimously that IRAs should join pensions, 401(k)s, Social Security and other benefits tied to age, illness or disability, that are afforded protection under federal bankruptcy law and thus shielded from creditors in bankruptcy proceedings.
Until recently, IRA protection was covered by state laws, which varied to a great extent on coverage provided. This ambiguity led to a great deal of confusion and uncertainty for IRA owners wondering how their assets were protected from creditors.
The case before the Supreme Court was heard because of a lower court ruling against IRA protection based on the faulty notion that since investors can make IRA withdrawals at any time, IRAs are similar to savings accounts, which are unprotected from creditors under bankruptcy law.
Justice Clarence Thomas, writing for the Court, said a bankrupt Arkansas couple was entitled to keep more than $55,000 in retirement savings from creditors. He reasoned that IRAs are benefits tied to a person's age under the federal statute because a tax penalty is imposed if a person makes withdrawals before age 60.
Interestingly enough, the court did not choose to address the topic of whether very large IRA accounts would be protected under the federal bankruptcy code. The code has a provision stating that certain assets (such as retirement plans) that are deemed to be "reasonably necessary" to support a debtor and his/her family are protected from creditors.
The uncertainty of what is "reasonably necessary" means some assets in extremely large IRAs might not be protected. Having said that, this issue will surely be brought to the court's attention in the future. However, for the time being, the vast majority of Americans will not have to worry about creditor attachment of their IRAs.
The ruling comes at a time when IRA assets are set to reach the $3 TRILLION mark and, for many Americans, the IRA has become their most significant retirement asset. Having the same protection in bankruptcy that workers receive for their 401(k) plans and company pensions shields a nest egg relied upon by millions of Americans and provides another layer of financial protection.