Under Bankruptcy, Inherited IRAs Are Nolonger Exempt Retirement Accounts

Unlike a debtor's own traditional individual retirement account (IRA), a debtor's inherited IRA isn't an exempt asset of his bankruptcy estate under Bankruptcy Code §522(d)(12).

Generally, the Bankruptcy Code provides for two basic exemption regimes: (1) the statutory federal exemptions under 11 U.S.C. §522(d); and (2) exemptions under state or local law.

A federal bankruptcy exemption applies for certain tax-qualified retirement funds and accounts. Specifically, this retirement funds exemption is available for assets in a fund or account such as: Qualified benefit and contribution plans, including 401K plans; qualified annuity plans and tax-sheltered 403(b) annuities); traditional IRAs, SEP-IRAs, and SIMPLE IRAs; Roth IRAs; qualified governmental plans deferred compensation plans of state or local governments or tax-exempt organizations; tax-exempt organizations.

Background on inherited IRAs

If an IRA owner designates his spouse as beneficiary of his IRA and dies before the account is exhausted, the surviving spouse may roll over the decedent's IRA into the spouse's own IRA, or elect to treat the decedent's IRA as the spouse's own IRA.

A designated nonspouse beneficiary can't treat an inherited IRA as his own, but can make trustee-to-trustee transfers of the inherited amount to another IRA if the ownership of the new IRA is set up in the same way as the ownership of the old IRA, that is, in the name of the decedent for the benefit of the IRA beneficiary.

If the account owner dies before his required beginning date or RBD (which, for IRA owners, is Apr. 1 of the year following the year in which the owner attains age 70 1/2), the entire balance in a participant's plan account must be: distributed within five years after the account owner's death; or distributed to (or for the benefit of) the designated beneficiary, over the beneficiary's life or over a period that doesn't extend beyond his life expectancy.

Slightly more liberal rules apply if the account owner dies after his RBD.

New Bankruptcy rules by the Court states that an IRA inherited by a beneficiaryis a non-exempt asset of the bankruptcy estate. The Court concluded that funds in an inherited IRA are not funds intended for retirement purposes but, instead, are distributed to the beneficiary of the account without regard to age or retirement status.

This content is not meant to constitute advice of any kind, including without limitation, legal advice of any kind. If you require advice in relation to any legal matter you should consult an appropriately qualified lawyer.

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