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Retirement Planning > Saving for Retirement

IRAs Protected Under Bankruptcy Law

By Arthur D. Postal

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Washington

A Supreme Court decision that Individual Retirement Accounts are exempt from seizure by creditors in bankruptcy is being applauded by the life insurance industry, which consistently has supported such a policy.

The courts unanimous decision was written by Justice Clarence Thomas.

Jack Dolan, a spokesman for the American Council of Life Insurers, which lobbied intensely for that policy to be clarified in the bankruptcy reform legislation recently considered by the House, said insurers applaud the decision.

“This is a good decision, highlighting the importance of saving for retirement and a recognition of the special tax status Congress has accorded retirement savings,” Dolan said. “It also reflects Congresss direction on the bankruptcy bill.”

Dolan said the decision is especially important for people saving for the future who dont have an employer-based plan.

“There has been some concern whether IRAs would receive the same protections as an employer-sponsored plan in a bankruptcy case,” Dolan said. “With the Supreme Courts ruling, it is clear that savings in IRAs, as well as employer-sponsored plans, are protected.”

The decision was handed down in a case involving an Arkansas couple, aged 60 and 57, forced into bankruptcy by illness and loss of their jobs.

Lower court decisions held that the $55,000 in retirement savings the couple had accumulated from work and transferred into IRAs when they both were laid off should be made part of their bankruptcy estate and used to repay creditors.

These courts said the funds in an IRA should be made available to creditors because the IRAs gave the couple no right to receive payment “on account of age,” because funds in IRAs can be withdrawn before age 59, albeit with a penalty.

But the high court disagreed, saying that in practice few people withdrew IRA money before 59, among other reasons.

As a result of the Supreme Court decision, IRAs now join pensions, 401(k)s, Social Security and other benefits tied to age, illness or disability that are afforded protection under bankruptcy law.

However, the decision doesnt mean that all funds in IRAs are off-limits to creditors. Bankruptcy law says that retirement savings are shielded from creditors only to the extent the money is “reasonably necessary for the support of the debtor and any dependent.”

Reproduced from National Underwriter Edition, April 8, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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