The US Supreme Court has unanimously ruled that funds held in inherited IRAs are NOT “retirement funds” and therefore are not protected in bankruptcy. It is clear that IRAs are exempted but, before the Clark case decision, whether an inherited IRA was subject to the same protection had varying precedent. The decision in Clark is another reason why naming a qualified trust as beneficiary of an IRA is beneficial.
This decision covers both Roth and Traditional IRAs.
An inherited IRA is a traditional or Roth IRA that has been inherited after its owner’s death.
Justice Sotomayer delivered the opinion-
If the heir is the owner’s spouse, as is often the case, the spouse has a choice: He or she may “roll over” the IRA funds into his or her own IRA, or he or she may keep the IRA as an inherited IRAs spouse inherits the IRA, he or she may not roll over the funds; the only option is to hold the IRA as an inherited account. Inherited IRAs do not operate like ordinary IRAs. Unlike with a traditional or Roth IRA, an individual may withdraw funds from an inherited IRA at any time, without paying a tax penalty. Indeed, the owner of an inherited IRA not only may but must withdraw its funds: The owner must either withdraw the entire balance in the account within five years of the original owner’s death or take minimum distributions on an annual basis. Relying on the “plain language of §522(b)(3)(C),” the court concluded that an inherited IRA “does not contain anyone’s ‘retirement funds,’” because unlike with a traditional IRA, the funds are not “segregated to meet the needs of, nor distributed on the occasion of, any person’s retirement.”