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Tuesday April 05, 10:35
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Supreme Court ruled IRA’s cannot be withdrawn early and reached by creditors
(by Brigitta Zulfitzler)
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Creditors may not take possession of Individual Retirement Accounts when people file for bankruptcy, the Supreme Court ruled yesterday. The court’s unanimous decision brings security to savings of 45 million Americans.
The ruling sets IRAs equal to pensions, 401(k) plans, Social Security and other benefits tied to age, illness or disability that are protected under bankruptcy law. Previously, 10 percent tax penalty should have been imposed for withdrawals from IRA accounts before a person turns 60 years old. This penalty created heavy obstacles for early withdrawal.
"It’s very helpful that the Supreme Court weighed in on the issue because there have been some inconsistent rulings in the lower courts," said Laura Fisher, spokeswoman for the banking industry trade group.
The pretext of the lawsuit was the case of Richard and Betty Jo Rousey of Berryville, Ark., who saved $55,000 and after retirement rolled the funds over to IRAs. Afterwards, being unable to hold down new jobs, partly because of his chronic back pain, they were forced to live on $2,000 a month.
IRA’s withdrawal turned out to be the only way out for them.
"If you can’t protect that money when you roll it over into an IRA from one employment situation to the next, which is what happened to the Rouseys, then we’re in big trouble for the long term," said Jean Constantine-Davis, an attorney with the AARP, which filed a brief with Supreme Court on the Rouseys’ behalf.
The ruling is of great importance as more and more people prefer 401(k) accounts to company pensions and change their jobs with greater frequency, taking their retirement funds with them
However, some new concerns appeared connecting safety of bankruptcy law. "My concern is that this [ruling] will provide a shelter for someone to avoid bankruptcy law," Mr. Gutter, professor of family financial management at the University of Wisconsin-Madison, said.
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