Filing Bankruptcy with an Inherited IRA

Bankruptcy exemptions of an inherited IRA bankruptcy filing are under severe criticism, discussions and debate. When you possess an IRA account which rolled over from your spouse or parents upon their death, it is known as an inherited IRA. As you were the beneficiary of the IRA account, you would be under presumption that this inherited IRA will also be exempted just like that of your own IRAs. However, bankruptcy laws allowing exemptions of inherited IRAs are quite unclear and vary with each state.

State Laws for Inherited IRA

Certain states like Alaska, Arizona, Idaho, Maryland, Missouri, Arizona, Connecticut, Kansas and Tennessee protects the inherited IRAs also just like the debtors’ own IRA. While most of the other states have held that inherited IRAs cannot be exempted as the inherited IRA was not developed with debtor’s own funds. Few other states’ bankruptcy courts involve the application of objective analysis to exempt or not to exempt inherited IRAs from being liquidated for debts payment.

Spousal Inherited IRAs

When you have inherited IRA from your spouse after his or her death, then it can be rolled over as your own IRA account without paying any penalty for roll over. Such spousal inherited IRAs can generally be appealed for protection against bankruptcy liquidation up to a maximum amount of $1 million.

Conflicts and Debates

The 8th circuit Bankruptcy Appellate Panel has ruled out that even inherited IRAs can be protected and exempted from the bankruptcy estate. The appellate panel has argued that “As per the Section 522 (d) (12) of the Bankruptcy Code, retirement funds are exempted from the bankruptcy estate. This section of the bankruptcy law has not specified the source for the retirement funds. Hence, it is ambiguous in stating simply retirement fund; so even inherited IRAs can also be claimed for exemptions”.

Filing Bankruptcy with an Inherited IRA

Thus you should have understood clearly that your inherited IRA being exempted from the bankruptcy estate purely relies on your state’s bankruptcy rules and regulations on inherited IRAs. However, you can appeal for its exemption, after the bankruptcy trustee refuses to accept it for exemption. Depending on the objectivity of the appeal panel your inherited IRA may either get accepted or denied for exemption from bankruptcy estate.

Getting Legal Help

Taxation laws and bankruptcy laws surrounding the IRA and inherited IRAs are quite complicated; moreover they get updated quite frequently. Hence, it is wise to take the professional help from a bankruptcy attorney who could help you out in filing bankruptcy with an inherited IRA.