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Inherited IRAs May Be a Factor in Deciding Whether or Not to File for Bankruptcy

When you file for bankruptcy, you generally don’t have to worry about losing your retirement accounts. Your 401(k) remains untouched by bankruptcy and IRAs are protected up to $1.2 million dollars. This retirement money is meant to allow you to keep your fresh start and prevent debtors from running into the same problems in old age.

What about inherited IRAs, though? According to the U.S. Supreme Court, inherited IRAs are not considered real retirement funds. The rationale behind this decision was threefold:

  1. You cannot continue to add money to inherited IRAs to build towards a retirement fund.

  2. You can receive a total distribution of the inherited accounts at any time, regardless of your age, and use the funds for any purpose without any penalty, which means that the money may not be used for retirement.

  3. You must start taking a minimum distribution every year on the IRAs quite quickly, whether you are close to the retirement age or not.

As such, inherited IRAs will be considered non-exempt assets in a bankruptcy. Even large sums held in IRAs will be subject to creditor demands. Because of this change, you should be careful to assess the merits of spending the IRA legally before having it claimed by creditor as part of a bankruptcy estate. The experienced Ohio bankruptcy attorneys with LHA will be able to help you best plan a legal bankruptcy strategy around this asset.

What If the IRA Was My Spouse’s?

There is one exemption to inherited IRAs, however. If your spouse dies, leaving you as the sole beneficiary of their IRA, you may be able to keep this fund protected when filing for bankruptcy. This exemption is allowed because federal tax code provides you the option of rolling funds from your deceased spouse’s IRA directly into your own retirement fund. Under this option, the three arguments refuting bankruptcy protection for inherited IRAs do not apply, so the funds stay exempt.

In general, however, you should not depend on keeping any money exempt from being rolled into your bankruptcy estate without first discussing the issue with an experienced bankruptcy lawyer. Bankruptcy law is complex and ever-changing, which makes it difficult for average consumers to best protect their assets under bankruptcy law. When filed correctly, though, bankruptcy offers you the chance at a fresh financial start while retaining as many important assets as possible.

If you are considering bankruptcy as an option to help you escape from overwhelming debts, call the Ohio bankruptcy attorneys at Luftman, Heck and Associates right away at (216) 586-6600 Find out how we may be able to develop the ideal strategy for protecting and leveraging your assets to maximize the benefits offered by bankruptcy freedom.