Creditors Ordered to Keep Hands Off IRAs

The United States Supreme Court recently held that individual retirement accounts (“IRAs”) were beyond the reach of creditors. This was a unanimous decision which preserves IRA assets for all taxpayers, even those who have filed for bankruptcy. Prior to this decision, there was confusion and conflicting decisions among the various states. There are certain core criteria for the IRA to be protected from creditors. A couple’s IRA needs to meet the following three requirements:

  • the right to receive payment must be from a qualified stock bonus, pension, profit sharing, annuity or similar plan or contract, the assets of which form the basis of a rollover IRA;
  • the right to receive payment must be on account of illness, disability, death, age, or length of service. Retirement at early or normal retirement dates meets this condition; and
  • the right to receive payment is exempted only to the extent that it is “reasonably necessary to support the account holder and his or her dependents.” If the IRA is used to provide retirement benefits for the couple, this requirement has been met.

The Supreme Court’s decision puts to rest a number of controversies, and should provide comfort for retirees. As always, it is important to keep beneficiary designations for each IRA up-to-date.

— Mike Beausang

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