Are IRS retirement accounts protected in bankruptcy? In a landmark ruling the Supreme Court said that IRAs that are inherited are absolutely “not retirement funds” and are therefore not exempt in personal bankruptcy. The Supreme Court reasoned this because:
1. The debtor likely never invested any monies in the account;
2. No matter what the age, holders of inherited IRAs must begin withdrawals immediately (unlike regular IRAs when the withdrawals can be delayed until age 70 and ½;
3. The holder of an inherited IRA can withdraw all of the monies, and pay the tax but no penalties, while the holder of a regular IRA would pay a penalty if withdrawing all of the monies prematurely.
