The U.S. Supreme Court today gave life insurers and others a long-sought victory by adding a layer of protection to Americans’ retirement savings.[@@]
The court ruled assets in individual retirement accounts normally are exempt from seizure by bankruptcy creditors.
The court’s unanimous decision, written by Justice Clarence Thomas, came in a case involving an Arkansas couple forced into bankruptcy by illness and unemployment. The spouses are 60 and 57.
The couple accumulated $55,000 in retirement savings in an employer-sponsored plan, then rolled the cash into IRAs when they lost their jobs.
A bankruptcy court, a bankruptcy appellate court and an 8th U.S. Circuit Court of Appeals decision all held that the couple had to include the IRA assets in their bankruptcy estate and use the assets to repay creditors.
The lower courts said the IRAs gave the couple no right to receive payment “on account of age,” because funds in IRAs can be withdrawn before age 59.5, with a penalty.
But the Supreme Court disagreed, saying that, in practice, few people withdraw money from IRAs before age 59.5.
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 does not mean that all funds in IRAs are off-limits to creditors. Bankruptcy law says retirement money is shielded from creditors only to the extent that the money is “reasonably necessary for the support of the debtor and any dependent.”
“This is a good decision,” says Jack Dolan, a spokesman for the American Council of Life Insurers, Washington. “This decision is an especially big deal for people saving for the future who don’t have an employer-based plan.”
The new ruling echoes the ACLI’s argument that IRA assets should enjoy the same legal protection that assets in employer-sponsored plans have enjoyed, Dolan says.