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Inherited IRAs and Bankruptcy

The area of creditor protection and inherited IRAs has been a murky one. On one hand, IRAs are intended to provide for the account owner in his or her retirement not for the retirement of their children. On the other hand, the Tax Code allows inherited IRAs to remain tax deferred (when certain conditions are met) until distributions are taken from the account.

Generally creditor protection for IRAs is determined by state statute. For bankruptcy, however, protection is available at the federal level as long as the state allows use of the federal bankruptcy rules.

Over the last couple of years, the federal bankruptcy courts have ruled several times on whether or not an inherited IRA is an exempt asset in bankruptcy. In most cases the courts have held that the inherited IRA is an exempt asset in bankruptcy. In two cases where the bankruptcy court decided otherwise, the lower courts’ decisions have been reversed on appeal, with the most recent decision handed down on January 5, 2012.

If you have an inherited IRA and are in the unfortunate position of needing to declare bankruptcy, be sure to discuss including the inherited IRA as an exempt asset. Don’t assume that your attorney will automatically do this.

-By Beverly DeVeny and Jared Trexler


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Thursday's Slott Report Mailbag

Consumers: Send in Your Questions to [email protected]

I transferred a stock from my IRA to my regular (non IRA account) and then transferred the exact same number of shares of the same stock back into my IRA within 60 days. However, the value of those shares was $10,000 higher.

Do I have a problem because I put more money into the IRA even though I transferred the same number of shares?


There is no problem. Your distribution of property (shares of stock) from your IRA qualifies to be rolled over tax-free within 60 days only if the identical stock is rolled over to a receiving IRA. It is common for the value of stock to change during the 60-day window. That’s OK and still qualifies as a tax-free rollover. When your tax return is filed for the year, your tax preparer may want to attach a note to explain the different values.