U.S. Supreme Court Finds IRAs Exempt from Bankruptcy Collections

WASHINGTON-The U.S. Supreme Court decided April 4 that Individual Retirement Accounts are protected under Chapter 7 bankruptcy filings. In Rousey et ux. v. Jacoway, the Supreme Court found that IRAs are exempt from the bankruptcy estate because the law states that a debtor may withdraw from the estate his "right to receive.a payment under a stock bonus, pension, profitsharing, annuity, or similar plan or contract on account of.age." Justice Clarence Thomas handed down the opinion. He stated that accounts are "similar" to those listed because "their common feature is that they provide income that substitutes for wages earned." The Rouseys had sought to protect their IRAs from creditors following a bankruptcy filing. The Bankruptcy Court and Eighth Circuit Court affirmed the respondent's stance that the accounts were readily available to the Rouseys at any time. However, the Supreme Court determined that the Rouseys `right to the balance held in those accounts is restricted. "That right is restricted by a 10 percent tax penalty on any withdrawal made before age 59-1/2, 72(t). Contrary to Jacoway's contention, this 10 percent penalty is substantial," Thomas wrote. "It applies proportionally to any amounts withdrawn and prevents access to the 10 percent that the Rouseys would forfeit should they withdraw early. It therefore effectively prevents access to the entire balance in their IRAs and limits their right to `payment' of the balance. And because this condition is removed when the accountholder turns age 59-1/2, the Rouseys right to the balance of their IRAs is a right to payment `on account of" age," Thomas wrote.