Inherited IRA's Are NOT a Protected Asset Class in FEDERAL Bankruptcy Proceedings - John R. Dundon II, Enrolled Agent
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Inherited IRA’s Are NOT a Protected Asset Class in FEDERAL Bankruptcy Proceedings

Inherited IRA’s Are NOT a Protected Asset Class in FEDERAL Bankruptcy Proceedings

Traditional retirement accounts are generally speaking considered a protected asset should you be required to endure FEDERAL bankruptcy protection. However an Inherited IRA is not generally considered a protected asset in 2 distinguishable regards:

  1. The distributions of funds from an inherited IRA to a surviving beneficiary transforms the nature of the IRA.  An inherited IRA is subject to a different set of rules.  It must be set up and maintained in the name of the deceased IRA owner for the benefit of the beneficiary. The beneficiary may make no contributions to the new account nor may he/she roll the inherited funds over into another retirement plan. Beneficiaries of inherited IRA’s may make withdrawals at any time without penalty, but must either start taking lifespan-measured withdrawals within one year or withdraw the it all within five years.

  2. The funds contained 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.

For these reasons inherited IRA’s are considered non-exempt assets of a debtor’s federal bankruptcy estate.  However I was recently presented a document illustrating that 4 state bankruptcy court cases exist whereby the ruling handed down  protected inherited IRA’s from creditors (Idaho 2008,Minnesota 2010, Pennsylvania 2010 and Arizona 2011). The lesson learned is that there is a difference between filing a bankruptcy petition at the state level vs. the federal level when taking into consideration protecting an inherited IRA from creditors and in some rare past instances inherited IRA’s have been protected from creditors in state bankruptcy.  For further information please contact a bankruptcy attorney.