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Inherited IRA funds not considered ‘retirement funds’

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The Supreme Court of the United States unanimously held Thursday that funds contained in an inherited individual retirement account do not qualify as “retirement funds” within the meaning of a bankruptcy exemption.

Justice Sonia Sotomayor delivered the opinion for the court, which affirmed the 7th Circuit Court of Appeals. She noted three legal characteristics of inherited IRAs led the court to conclude the funds held in such accounts are not objectively set aside for purposes of retirement.

“First, the holder of an inherited IRA may never invest additional money in the account. Inherited IRAs are thus unlike traditional and Roth IRAs, both of which are quintessential ‘retirement funds.” She wrote. “Second, holders of inherited IRAs are required to withdraw money from such accounts, no matter how many years they may be from retirement. … Finally, the holder of an inherited IRA may withdraw the entire balance of the account at any time – and for any purpose – without penalty.”

The decision comes in Clark v. Rameker, 13-299, in which an IRA was inherited by a daughter who later filed for bankruptcy. Heidi Heffron-Clark argued the inherited IRA was still a retirement fund, and therefore, was exempt from creditors under Section 522 of the U.S. Bankruptcy Code. The 7th Circuit held that when an IRA was inherited by someone other than the owner’s spouse, it was no longer exempt from creditor’s claims.

Sotomayor also noted that the possibility that some investors may use their inherited IRAs for retirement purposes does not mean that the inherited IRAs bear the defining legal characteristics of retirement funds.

“Were it any other way, money in an ordinary checking account (or, for that matter, an envelope of $20 bills) would also amount to ‘retirement funds’ because it is possible for an owner to use those funds for retirement,” she wrote.

 

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