The Supreme Court ruled in June that inherited individual retirement accounts (IRA) are not protected under federal bankruptcy laws. If someone has their own IRA, this cannot be lost to banks and other debtors, but any inherited IRA accounts left to children or other heirs are not protected in federal bankruptcy. Should a bankruptcy case only apply in the state, Texas has laws that protect inherited IRA accounts.

Inherited IRA Supreme Court Case

The court case in question involved a woman whose mother left her an IRA account after she died in 2001. In 2010, the woman and her husband filed for bankruptcy. At this time, the inherited IRA account was worth about $300,000. In the bankruptcy case, the woman claimed that this IRA account was an exempted asset since it was a retirement fund.

In the trial, the woman’s creditors questioned the legitimacy of the IRA being considered a protected retirement account since it did not belong to her, but rather to her mother. If it was her own retirement account, it would have been federally protected. Since it belonged to her mother, the creditors challenged that it was not treated like her retirement account and was available to pay back debts.

The Supreme Court found three ways than an inherited IRA account differs from a retirement account:

• Money cannot be added to an inherited IRA in the same way it could be added to a retirement account;
• Money from an inherited IRA can be taken at any time for any financial purpose without penalty; and
• Beneficiaries of inherited IRA accounts must take the required minimum distributions beginning the year they inherit the account no matter how far away from retirement.

Due to these provisions, inherited IRAs are not totally retirement funds and are not protected under federal law as a retirement plan. However, states have taken action to protect inherited IRA accounts in the event of bankruptcy.

In Texas, inherited IRA accounts are protected in state bankruptcy cases. If you are concerned about the status of your inherited IRA or wondering how you can further protect an IRA account you are seeking to leave, give our firm a call for a free consultation!