Is My IRA Protected If I File For Bankruptcy?


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Due to a recent United States Supreme Court ruling, there seems to be some confusion out there as to whether or not someone’s individual retirement account (“IRA”) is protected if you file for bankruptcy.  As is the case with most things in life, and depending on where you live, the answer is “maybe.”

An IRA is a retirement planning tool that allows you to grow your investments tax differed.  It is very common type of savings.  There are different kinds of IRAs, such as a “Roth” or a “Traditional” IRA, but for purposes of this discussion, the type does not matter.  What does matter, however, is how you obtained the IRA.

Federal Bankruptcy Laws

Traditionally, retirement accounts are almost always protected from creditors and are considered “exempt” when a bankruptcy is filed.  An “exemption” in a bankruptcy just means that the asset is safe from the clutches of the court and the bankruptcy filer can keep it with no problem.  The Federal Bankruptcy Code lists certain assets that are exempt.  IRAs are certainly on that list, but only if you or your spouse were the ones contributing to that IRA.   In Clark v. Rameker, the U.S. Supreme Court unanimously ruled that “inherited” IRAs are NOT exempt assets in the eyes of a bankruptcy and thus can be taken by the bankruptcy trustee (1).  In the eyes of the federal bankruptcy laws, once an IRA is passed on and inherited by another, it loses its protected status.  In essence, an inherited IRA worth $100,000.00 is looked at no differently than a pile of cash on your living room table worth $100,000.00. This does not apply to spouses.  If your spouse dies, the IRA you get from him/her is considered a “rollover IRA” and it remains protected.    It is important to note that the federal bankruptcy exemptions do not apply in every state.  Each state has the option to “opt out” of the federal exemptions and come up with their own.

What about Florida?

If you are reading this article, there is a very good chance that you reside in Florida.  Florida is one of the states that opted out of the federal bankruptcy exemptions and came up with its own (2).  Just like in the federal exemptions, IRAs are protected if you did not inherit the IRA.  But unlike the federal exemptions, an inherited IRA is also protected under Florida’s exemptions.  That means that you can inherit and IRA worth $10 million dollars, file for bankruptcy, and the IRA will remain yours.   Keep in mind that you can only claim the Florida exemptions if you have lived in Florida for a period of time.  Once you move out of state, you risk potentially turning your inherited IRA into an unprotected asset.  This is very important to consider when you are drafting your will.  Do you leave your IRA to your kids?  Can you be sure that they will remain in Florida?  If you are unsure of where your heirs plan on residing, you might consider leaving your IRA to a trust with your heirs designated as beneficiaries.  That is a conversation to have with your financial advisor and estate planning attorney.  There are a few different states with laws similar to Florida’s regarding IRAs.  Make sure you ask an attorney licensed in a particular state about that state’s exemption laws to learn whether or not your assets are safe.

(1) Clark v. Rameker, 134 S. Ct. 2242 – 2014

(2) Florida Statute 222.21(2)(c)

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