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Inherited IRAs Not Protected in Bankruptcy


Posted on Sep 17, 2014

Is Your Retirement Protected In Bankruptcy?

While retirements accounts such as traditional IRAs, Roth IRAs, 401Ks and pension funds are protected when you file a bankruptcy case, this year the Supreme Court resolved a decade’s old question – when you inherit an IRA, the funds are not protected in bankruptcy.

The plaintiff in the case – Heidi Heffrom-Clark – inherited an IRA from her mother in 2001. When she and her husband filed Chapter 7 nine years later, she tried to exclude the IRA funds from the bankruptcy estate. As the account had about $300,000 in it, her creditors objected.

The court decided that the inherited IRA doesn’t have the same characteristics as a traditional IRA, so it disallowed the exemption. Essentially, since IRA inheritors can’t contribute additional funds to the account, and they can take money out of the account at any time without penalty, the funds are no longer “retirement funds” and cannot be protected.

As a result, if you have an inherited IRA as part of your assets, a bankruptcy case will mean that the IRA is potentially available to be liquidated to satisfy creditors.

If you have been considering bankruptcy and have questions about protecting your retirement accounts, give us a call at 816-842-6200. Or you can email us and schedule your free consultation.

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Jason C. Amerine
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President and Owner, Castle Law Office of Kansas City
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