Individual retirement accounts and 401k retirement accounts, along with other recognized retirement plans, are exempted from seizure or interference in a bankruptcy. Federal bankruptcy law protects the owner’s retirement plans so that they pass unaffected through a bankruptcy filing both here in Arkansas or any other state. The asset cannot be touched by the bankruptcy trustee to help pay for a person’s debts, and the asset will remain effective and intact after the bankruptcy is discharged. However, the U.S. Supreme Court has ruled that an inherited IRA is not exempt and will be lost in a bankruptcy.
The nation’s highest court ruled that anyone filing for bankruptcy relief must forfeit the full amount of an IRA that was inherited, and allow the money to be used to pay off creditors. It is not uncommon, for example, that an elderly parent may leave an intact IRA to a child upon the parent’s death. An experienced bankruptcy attorney will likely advise the owner of the inherited account to put off the bankruptcy filing until the funds can be spent down appropriately and legally.
The Supreme Court decided that the federal laws that protect IRAs and other retirement accounts do not give the same protection to inherited IRAs that were owned by someone other than the bankruptcy filer. It is expected that the decision will dictate the same fate for inherited 401k plans that appear as assets in a bankruptcy. The Court reasoned that the holder of the inherited account could withdraw the balance at any time without penalty, could not invest new money into the account and could withdraw the balance for any reason.
All of those factors made the funds very much different than qualified retirement funds that are protected for bankruptcy purposes. There is an exception for qualified retirement accounts inherited from a deceased spouse. Those accounts qualify for protection in bankruptcy. A resident of Arkansas who is contemplating filing will benefit greatly by consulting with an experienced consumer bankruptcy attorney to determine the status of all assets and whether they may be legally preserved while obtaining needed bankruptcy relief.
Source: post-gazette.com, “Inherited IRAs may be factor in filing for bankruptcy“, Tim Grant, Jan. 29, 2016