WASHINGTON – With the number of personal bankruptcies rising throughout the nation, the Supreme Court considered Wednesday whether IRAs, the popular retirement savings accounts, are shielded from being seized by creditors during a bankruptcy.
Federal law clearly exempts from seizure pensions, 401(k)s, Social Security benefits and similar plans that give people a “right to receive” payments “on account of illness, disability (or) age.” However, ordinary savings accounts can be seized by a bankrupt person’s creditors.
Not surprisingly, courts around the country are split on whether an IRA, or Individual Retirement Account, should be treated like a pension plan or a savings account.
AARP, the advocacy group for older Americans, says the ruling could have a broad effect because 1.6 million people filed for bankruptcy in the United States last year. But it would apparently not affect people in California, which is among the states that have shielded IRAs from being seized during a bankruptcy, the court was told.
At least 45 million taxpayers have established IRAs, which enable them to save as much as $3,000 a year tax-free. They may withdraw money from these accounts, but they face a 10 percent tax penalty if they take out the money prior to age 591/2.
To clarify federal law, the Supreme Court took up the case of Richard and Betty Jo Rousey, an out-of-work Arkansas couple who face the loss of their only retirement savings. The two left their jobs with Northrop Grumman Corp. in 1998.
Each had set up a retirement savings account at Northrop, but when they left, they were forced to roll over the money into IRAs. His account had nearly $43,000, and hers had $12,000.
Still unable to find work, the couple was overwhelmed by debts and declared bankruptcy. A court trustee, Jill Jacoway, was appointed to assume control of their assets and to distribute the proceeds among their creditors.
Jacoway maintained that the couple’s IRAs could be seized, and a bankruptcy judge and the U.S. court of appeals in St. Louis agreed with her. The judges reasoned that an IRA was like a savings account because money could be withdrawn from it.
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