Supreme Court Hears Case Regarding Shielding IRAs from Creditors

December 2, 2004 ( - The US Supreme Court heard arguments Wednesday on whether Individual Retirement Accounts (IRA) can be shielded when holders file for bankruptcy.

>Bankruptcy law already protects pensions, 401(k) accounts, Social Security and other benefits that are tied to age, disability or illness. But IRAs, which can be drawn upon early for a 10% penalty, are considered somewhat different.

>The case, involving Richard and Betty Jo Rousey of Arkansas, revolves around whether people who declare bankruptcy can shield their IRA funds from creditors. The couple had accumulated $55,000 in company-sponsored pension and 401(k) plans before Richard Rousey took early retirement in 1998 and Betty Jo Rousey was laid off a month later, according to the Associated Press (AP). After the events of that year, they rolled their money over into IRAs. The two have been unable to hold down new jobs since, citing back pain, and are now living on $2,000 a month, according to their lawyers.

>The couple filed for bankruptcy in 2001 and claimed an exemption for their IRAs, according to the AP. Lower courts disagreed with the couple, stating that the ability to withdraw funds at any time made the funds seem more like saving accounts than retirement accounts.

>Justice Sandra Day O’Connor suggested that the line that lower courts had drawn between IRAs and other accounts may not be so clear, since 401(k)s allow for hardship withdrawals, as well as ones for medical purposes, the AP reports. She suggested that IRAs should possibly be given protection in cases where the money is necessary to support the debtor and any dependant.

>Justice Anthony Kennedy was more critical, questioning whether an account that allows withdrawal at anytime should be considered a “retirement account”. Justices Stephen Breyer, David Souter, Ruth Bader Ginsburg, John Paul Stevens, and O’Connor were more supportive of the IRA as a retirement plan, noting that more that 98% of the accounts are not touched until the age of 60, the AP reported.

>The case is Rousey v. Jacoway, and a ruling is expected in July.