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June 10, 2004 at 08:00 PM
Supreme Court Will Consider Bankruptcy Law Treatment Of IRA Assets
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The U.S. Supreme Court may decide whether rolling 401(k) plan assets into ordinary individual retirement accounts exposes the assets to attacks by creditors in bankruptcy cases.
The court has agreed to consider Rousey vs. Jacoway, a case originally heard in Arkansas.
Richard and Betty Jo Rousey, the husband and wife involved in the case, worked for an aerospace manufacturer. After they stopped working for the manufacturer, they rolled about $55,000 in 401(k) plan assets into 2 IRAs at a local bank in 1999. In 2001, they filed for protection from creditors under Chapter 7 of the U.S. Bankruptcy Code.
Documents from the Rousey’s bank show that the Rouseys could withdraw money from the IRAs at any time but might have to pay the 10% federal tax penalty on early IRA withdrawals.
The defendant in the case, Jill Jacoway, is the Rousey’s bankruptcy trustee. Jacoway has been responsible for determining which of the Rouseys assets can be used to pay creditors. Jacoway has argued that in Arkansas, which is under the jurisdiction of the 8th U.S. Circuit Court of Appeals, the courts have ruled that ordinary IRAs are part of the debtor’s bankruptcy estate.
The courts in the 2nd, 5th, 6th and 9th circuits say that, in most cases, federal bankruptcy excludes IRA assets from the debtor’s bankruptcy estate.
Thomas Goldstein, the Washington lawyer representing the Rouseys, says he thinks financial advisors should pay close attention to the case if the Rouseys lose.
“If we’re wrong, then maybe financial planners ought to be telling clients about not rolling their retirement assets into IRAs, because there’s always the possibility that they might go bankrupt,” Goldstein says.
