High court considers whether IRAs can be shielded from creditors in bankruptcy
December 1, 2004
WASHINGTON – The Supreme Court considered Wednesday how much retirement savings people can shield when they file for bankruptcy, an important question as more Americans go into debt.
The justices heard arguments in the case of a bankrupt Arkansas couple seeking to keep their two Individual Retirement Accounts.
Bankruptcy law already protects pensions, 401(k)s, Social Security and other benefits tied to age, illness or disability. Most justices appeared reluctant to allow the seizure of all the money in IRAs, a nest egg used by millions of people.
IRAs allow most investors to contribute up to $3,000 in earned income annually to a fund that grows tax-free until withdrawals.
Unlike many other retirement plans, IRAs permit cash withdrawals for any reason at any time so long as holders 591Ú2 and younger pay a 10 percent penalty tax.
“The statute says the right to receive payment is on ‘account of age,”‘ Justice Anthony Kennedy said. “If a client can take the money out at any time, why is it on account of age?”
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But Justice Stephen Breyer, backed by Justices David H. Souter, Ruth Bader Ginsburg, John Paul Stevens and O’Connor, noted more than 98 percent of IRA investors do not make withdrawals until age 60.
The stakes in the case are high. Last year, more than 1.6 million people filed for personal bankruptcy, compared with 875,000 a decade earlier. Experts say much of that is being driven by people 55 and older who lose their jobs and cannot pay off debts.
“Older Americans who lose their IRAs in bankruptcy will have a sharply reduced ability to support themselves in their retirement years,” AARP wrote in its friend-of-the-court filing seeking IRA protection.
The case involves Richard and Betty Jo Rousey of Berryville, Ark., who accumulated $55,000 in company-sponsored pension and 401(k) plans at Northrop Grumman Corp. before he took early retirement in 1998. When Betty Jo Rousey was laid off a month later, they rolled the funds over to IRAs.
The Rouseys have been unable to hold down new jobs, in part due to Richard Rousey’s chronic back pain, according to their lawyers. Richard, 60, and Betty Jo, 57, now live on $2,000 a month.
The couple filed for bankruptcy in 2001 and claimed an exemption for their IRAs. Lower courts disagreed, ruling the couple’s ability to withdraw funds at any time made the IRAs more like a “readily accessible savings account” that isn’t subject to protection.
Several justices pressed Colli C. McKiever, who represents the trustee overseeing the couple’s bankruptcy, on why IRAs should be treated differently from pensions and 401(k)s. They noted the couple had no choice but roll funds into IRAs after Betty Jo Rousey was laid off.
When McKiever responded that no other retirement plan covered in the statute allows withdrawal “at any time, for any reason,” O’Connor disagreed.
“Typically, plans like 401(k) plans allow hardship withdrawals. Others allow for medical reasons,” she said. “So it seems like a hard line to draw. We would have endless cases to litigate.”