– Est. –

Stretch IRA – The Rest of the Story

And Now You Know the Rest of the Story . . .

On November 24, 2010, we posted the blog article, “How Safe Is Your Stretch IRA?”, where we addressed several court cases in which the issue before the court was whether creditors could reach assets held by debtors in stretch IRAs. Well, your stretch IRA just got safer.

As you will recall, a stretch IRA is an individual retirement account that you inherit and then use the stretch-out provisions under the law to take payments over your lifetime (and thus defer the taxes on the distributions over your lifetime).

As we reported on November 24, 2010, several cases, including In re Chilton, had held that an inherited IRA was not entitled to the protections allowed to traditional IRAs under the Bankruptcy Code.

A district court in the Fifth Circuit has now reversed the bankruptcy court’s decision. See here. The district court noted that since the bankruptcy court’s decision, five other courts have all concluded that inherited IRAs do meet the requirements for a Bankruptcy Code exemption.

Agreeing with the reasoning of these other cases, the district court concluded that the funds in a debtor’s inherited IRA do not have to be the “retirement funds” of the debtor to satisfy the bankruptcy exemption requirements. The district court also concluded that inherited IRAs are among the IRAs that are exempt from taxation under § 408(e)(1) of the Internal Revenue Code, which provides that any individual retirement account is exempt from taxation. Because an inherited IRA meets these requirements, any differences between a traditional IRA and an inherited IRA are irrelevant for purposes of the bankruptcy exemption.