Many watching high court case on how inherited IRAs are treated

Upon the death of a loved one, family members might receive an inheritance, sometimes in the form of an inherited individual retirement account, better known as an IRA. Many people might choose to keep the account in that form with the ultimate goal of saving it for their own retirement. However, there is some uncertainty as to the status of these accounts in terms of how they are thought of by bankruptcy courts. This can be a real issue for people who elect to file for Chapter 7 or Chapter 13 bankruptcy protection.

The issue lies in how these accounts are classified. People who have Roth or traditional IRA accounts do not have to expose them to creditors, at least up to $1.25 million. However, some state courts have not extended the same protection to inherited IRAs, which they said were not retirement accounts in the traditional sense. Current federal law isn’t much help because there isn’t an official definition of retirement funds.

The issue is coming to light because of a woman who filed for bankruptcy in 2010. She inherited several thousand dollars in an IRA from her mother a decade earlier, and she is trying to prevent that money from going to creditors after her filing.

The Supreme Court of the United States is expected to rule on the issue later in the year. People who have large amounts in inherited IRAs and are considering a bankruptcy filing might benefit from getting a more detailed legal picture of the process from an attorney.

Source: The Wall Street Journal, “Shielding Inherited IRAs From Creditors,” Arden Dale, April 2, 2014