In a landmark, unanimous 9-0 decision handed down on June 12, 2014, the United States Supreme Court held that inherited IRAs are not “retirement funds” within the meaning of federal bankruptcy law. This means they are therefore available to satisfy creditors’ claims. (See Clark, et ux v. Rameker, 573 U.S. ______ (2014))
The Court reached its conclusion based on three factors that differentiate an inherited IRA from a participant-owned IRA:
1. The beneficiary of an inherited IRA cannot make additional contributions to the account, while an IRA owner can.
2. The beneficiary of an inherited IRA must take required minimum distributions from the account regardless of how far away the beneficiary is from actually retiring, while an IRA owner can defer distributions at least until age 70 1/2.
3. The beneficiary of an inherited IRA can withdraw all of the funds at any time and for any purpose without a penalty, while an IRA owner must generally wait until age 59 1/2 to take penalty-free distributions.