The Bell Tolls for Inherited IRAs

Posted by NCBRC - June 13, 2014

In a unanimous decision authored by Justice Sotomayor, the Supreme Court found that “[t]he text and purpose of the Bankruptcy Code make clear that funds held in inherited IRAs are not ‘retirement funds’ within the meaning of §522(b)(3)(C)’s bankruptcy exemption.” Clark v. Rameker (In re Clark), No. 13-299 (U.S.S.Ct. June 12, 2014).

The opinion focused on differences in treatment under the Tax Code between inherited IRAs which go to a surviving spouse, and those that go to someone other than the spouse. A spouse has the option of rolling over the funds into a new IRA, treated like any other IRA, but a non-spouse is limited to treating the funds according to rules applicable only to inherited IRAs. The latter type differs from regular IRAs in that funds must be withdrawn either in their entirety or in annual distributions; the heir may not make contributions to the fund, a factor the Court found to be a hallmark of a retirement account; and withdrawal of the funds does not give rise to tax penalty.

The Court rejected the argument that the nature of the funds should be determined with reference to their original purpose. “Instead, we look to the legal characteristics of the account in which the funds are held, asking whether, as an objective matter, the account is one set aside for the day when an individual stops working.” The crux of the decision came in the discussion of the purpose of bankruptcy and the Court’s finding that where Congress intended to protect retirement funds and the debtor could access the inherited funds prior to retirement, the inherited IRA smacked of windfall.  “[N]othing about the inherited IRA’s legal characteristics would prevent (or even discourage) the individual from using the entire balance of the account on a vacation home or sports car immediately after her bankruptcy proceedings are complete.”

The case involved claimed exemptions under federal law so it may be that some wiggle room remains in states with applicable exemptions that do not track the federal language.

Clark opinion


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  1. […] In a recent US Supreme Court decision, the Justices took a look at the issue of is an inherited IRA exempt under Federal exemptions (522(b)(3)(C). […]

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