Can You Protect an Inherited IRA in Bankruptcy?
by Luke Homen
Did you know that when you’re facing tough financial times and considering bankruptcy, an inherited IRA is often looked at differently than your own retirement savings? This can be a shock. While your personal retirement accounts usually have strong protection in bankruptcy, an inherited IRA might not. Knowing this upfront helps you understand your situation.
Facing debt is hard. Worrying about losing an inheritance adds another layer of stress. But figuring out what happens to an inherited IRA in bankruptcy starts with understanding a key court case and how Oklahoma law applies. Talking to a lawyer is the best way to know for sure how your specific inherited IRA could be treated if you file for bankruptcy.
Our Tulsa bankruptcy lawyers are here to help you protect your IRA during bankruptcy. We will explore all of your legal options and help you through this difficult time. Call Convenient Bankruptcy today at 405-639-2099 to talk about your situation.
What Exactly is an Inherited IRA?
An inherited IRA is an IRA you received after the original owner passed away. If you’re married to the person who passed, you usually have the option to treat the inherited IRA as your own. This means it gets the same protections your regular retirement accounts do.
However, if you inherited the IRA from someone other than your spouse, like a parent, sibling, or friend, it’s treated differently by the rules. While it still holds money that benefits you, and you might have plans to use it for your future, the law doesn’t see it the same way it sees an account you set up for your own retirement over many years.
When you inherit an IRA as a non-spouse, you can typically take money out whenever you want. There aren’t the same age restrictions or early withdrawal penalties that come with taking money from your own retirement account before you turn 59 ½. This difference is a big deal in the eyes of the law, especially if you file for bankruptcy.
The Supreme Court Stepped In: Clark v. Rameker
Back in 2014, the highest court in the country, the U.S. Supreme Court, looked closely at inherited IRAs in a bankruptcy case called Clark v. Rameker. The question was whether an inherited IRA counts as “retirement funds” that are protected from creditors in bankruptcy under federal law.
The Court decided that inherited IRAs are not “retirement funds” in the same way that your personal IRA or 401(k) is. Their reasoning was based on how inherited IRAs work for non-spouse beneficiaries. As mentioned, you can usually withdraw money from an inherited IRA whenever you want, for any reason, without penalty. This makes the money readily available to you, much like a regular savings account.
The justices explained that the purpose of protecting retirement funds in bankruptcy is to make sure people have money to live on when they stop working. However, since inherited IRAs don’t have the same rules forcing you to wait until retirement age, they don’t serve that same core purpose.
Therefore, the Court ruled that inherited IRAs are generally not exempt from creditors in bankruptcy under federal law. This means they can be included in your bankruptcy case and potentially used to pay off debts you owe.
How Clark v. Rameker Affects You in Oklahoma
Oklahoma has its own laws about what property you get to keep, or “exempt,” when you file for bankruptcy. You must use the Oklahoma exemptions when you file here; you can’t pick the federal bankruptcy exemptions instead. Oklahoma Statutes Title 31, Section 1 is where you find many of these exemptions.
Specifically, Oklahoma Statute Title 31, Section 1(A)(20) says you can exempt “any interest in a retirement plan or arrangement qualified for tax exemption or deferment purposes under present or future acts of Congress.” 1
This statute protects typical retirement accounts like 401(k)s and your personal IRAs because they are set up for retirement and have tax benefits. However, when it comes to inherited IRAs, the Clark v. Rameker Supreme Court ruling changed the landscape significantly across the country, including in Oklahoma.
Based on the Clark decision, inherited IRAs are usually considered non-exempt assets in bankruptcy. Even though an inherited IRA is still a tax-deferred account, the Supreme Court said its function for the beneficiary is different from a retirement fund.
There can sometimes be complex arguments made based on the specific wording of Oklahoma’s exemption statute. However, the general rule following Clark v. Rameker is that inherited IRAs are vulnerable in bankruptcy. It’s not as simple as just pointing to the state statute and assuming protection. The court will look at the nature of the asset, and the Supreme Court has clearly defined the nature of an inherited IRA for bankruptcy purposes.
Protect Your Future, Call Convenient Bankruptcy
If you have an inherited IRA and are considering filing for bankruptcy in Oklahoma, the most important thing you can do is talk to an experienced bankruptcy lawyer at our law firm right away. Don’t try to figure this out on your own or make any decisions about the inherited IRA money before getting legal advice.
Our Tulsa bankruptcy lawyers will look at your whole financial picture – all your assets, all your debts, and your income – to figure out the best path forward.
Call Convenient Bankruptcy in Oklahoma at 405-639-2099 to schedule a consultation. We can help you understand what bankruptcy means for your unique situation, including any inherited assets you may have.
Attorney Luke Homen is the President of Convenient Bankruptcy. He placed great value on helping individuals and families solve their financial challenges and achieve real financial freedom. His goal is to find a customized solution that fits each client’s unique situation. Luke has been practicing law since 2008, and was voted “Best Bankruptcy Attorney in Oklahoma” by The Oklahoman in the Reader’s Choice Awards.
