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Supreme Court decision affects protection of IRAs in bankruptcy

Many Colorado residents spend years trying to build up their retirement savings. It can take decades for IRAs and other retirement accounts to build up enough wealth to accomplish their goal of allowing a person to retire comfortably.

Understandably, then, individuals can be fearful of what will happen to their IRAs and other retirement accounts if it becomes necessary for them to file for bankruptcy. A new Supreme Court decision may have a significant impact on this issue.

The decision involved a case where a woman inherited an IRA from her mother in 2001. Nine years later, the woman filed for Chapter 7 bankruptcy, and the issue arose of whether the inherited IRA was protected in the bankruptcy, or whether creditors could reach those funds in the IRA. The Supreme Court concluded the IRA could not be protected from creditors.

Importantly, the case only impacts those IRAs that are inherited from others. Those types of accounts are different, the Court recognized, because additional funds cannot be put into the account and individuals can take money out without penalty.

Accordingly, those who may be filing for Chapter 7 should understand that the decision did not impact IRAs that are set up and funded by the person filing for bankruptcy. Those IRAs are typically protected from asset liquidation by creditors in bankruptcy, because the bankruptcy laws are formulated to allow individuals to have sufficient funds available during retirement. That being said, it is always a good idea for individuals to check on whether their particular account is protected.

Source: Forbes, "Supreme Court finds inherited IRAs not protected in bankruptcy," Deborah L. Jacobs, June 12, 2014

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