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Does Bankruptcy Law Protect IRA Assets?

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NU Online News Service, June 7, 2004, 7:01 p.m. EDT – The U.S. Supreme Court may decide whether debtors have a clear right to protect ordinary individual retirement accounts from bankruptcy creditors.[@@]

The court has agreed to consider Rousey vs. Jacoway, a case originally heard in Arkansas.

The husband and wife involved in the case worked for an aerospace manufacturer. They eventually rolled about $55,000 in 401(k) plan assets into 2 IRAs at a local bank.

U.S. bankruptcy law refers to IRAs and seems to imply, indirectly, that bankruptcy law protects some or all IRA assets from creditors in addition to protecting 401(k) plan assets and other retirement plan assets, Circuit Judge David Hansen, a judge with the 8th Circuit Court of Appeals, writes in an opinion released in October 2003.

But the 3-judge 8th Circuit panel argues that the law seems to exempt IRA and other retirement plan assets from the bankruptcy estate only when the debtors have trouble getting to the cash.

The law requires that debtors can take advantage of the retirement asset exemption when they may take withdrawals only on account of illness, disability, death, age or length of service, Hansen writes in the opinion.

If debtors can get to the cash simply by paying tax penalties and relatively minor early withdrawal penalties, then the exemption does not apply, Hansen writes.

But “we recognize that 4 of our sister circuits have reached a contrary result,” Hansen writes.

The circuits that say bankruptcy law protects IRA assets are the 2nd, 5th, 6th and 9th circuits, according to an opinion issued in a case heard at the local bankruptcy court level.


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