Supreme Court Protects IRAs in Bankruptcy

The Supreme Court recently ruled in Rousey v. Jacoway that Individual Retirement Accounts (IRA) may be protected from your creditors inside of a bankruptcy. The Rousey's were laid off by their employer and were given lump sum pension distrubutions which they deposited into seperate IRAs. Such rollovers are encouraged by the IRS who has made them nontaxable. Despite the IRS' prospective the Rousey's Bankruptcy Trustee objected to the IRA exemption and demanded the money to be distributed to their creditors. The Trustee convinced the Bankruptcy Court, the Bankruptcy Appellate Panel, and the 8th Circuit of Appeals that the IRA should not be protected. For more information on Bankruptcy exemptions go to http://www.bankruptcyhome.com/keepyourstuff.htm .At the Bankruptcy Appellate Panel attorneys argued for and against the belief that IRAs are "similar plans" exempt under §522(d)(10)(E). This specific section reads as follows:"(E) a payment under a stock bonus, pension, profit-sharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent..."In order for IRAs to be exempted under this section the IRA must be similar to the other plans listed. The court reasoned that the debtors did not have "limited access" to the funds held in their IRA. The lower courts reasoned that the 10 tax penalty did not constitute "limited access" and therefore the account did not meet §522(d)(10)(E) "similar plan" criteria. The Rousey's then appealled again to the 8th Circuit's Court of Appeals.The 8th Circuit's Court of Appeals heard the case and ruled that even if IRAs are "similar plans" they still had no right to receive payment "on account of age." The court stated that IRAs are, "readily accessible savings accounts of which the debtors may easily avail themselves (albeit with some discouraging tax consequences) at any time for any purpose." Failing the second, "on account of age," element IRAs were again held to be not protected in bankruptcy.The Supreme Court granted certiorari and determined that there are three factors to be considered in deciding whether IRAs can exempted under §522(d)(10)(E).1.) the right to receive payment must be from "a stock bonus, pension, profitsharing, annuity, or similar plan or contract"2.) the right to receive payment must be "on account of illness, disability, death, age, or length of service"3.) even then, theright to receive payment may be exempted only "to the extent" that it is "reasonably necessary to support" the accountholder or his dependents.The lower courts asserted that the first and second of these requirements were satisfied and therefore the exempting of the Rouseys' IRA was never justified. The first issue the Supreme Court turned to was the meaning of the phrase, "on account of." They reasoned, based on its usage in other areas of the Bankruptcy Code, that this phrase is the equivelent of "because of." From this it followed that, the right to receive payment be "because of" illness, disability, death, age, or length of service.Jacoway, the Rousey's Chapter 7 Trustee, argued that the right to receive payment was not "because of" any of the factors listed in the section since the Rouseys' could have withdrawn the money at any time for any reason provided that they pay the 10 penalty. Using this logic Jacoway asserted that there was no causal connection between the Rouseys' right to payment and age. The Supreme Court disagreed.The Supreme Court found that the 10 penalty levied for withdrawls before the benficiaries reach the age of 59 1/2 are substantial. Since the penalty is "substanial," they also reasoned that the penalty acted as a deterent to early withdrawls from the account. The deterent quality of the penalty led the Supreme Court to rule that there is a causal relationship between the right to receive payment and age. The Supreme Court also disagreed with Jacoway's contention that the plans are similar due to ultimately the same reason. Jacoway argued that unlike the other types of plans listed in the §522(d)(10)(E) IRAs are not similar due to the fact that the beneficiaries have "complete access" to them. For the reasons already spelled out above the Supreme Court was unwilling to accept this arguement. To find out more about asset protection in Bankruptcy it would be wise to speak with a bankruptcy attorney. For help finding one in your area check out http://www.bankruptcyhome.com/choosinganattorney.htm .

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