Clark v. Rameker

Funds contained in an inherited individual retirement account are not considered “retirement funds” for purposes of the bankruptcy exemption.

Petitioners filed for Chapter 7 bankruptcy, and identified as exempt an inherited individual retirement account (IRA) of roughly $300,000 from their bankruptcy estate under 11 U.S.C. § 522(b)(3)(C), the “retirement funds” exemption. The exemption permits a debtor to exempt retirement funds when those funds are in an account that is exempt from taxation under the Internal Revenue Code.

The Bankruptcy Court denied the exemption, concluding that an inherited IRA is not the same as a traditional IRA. The District Court reversed, reasoning that the bankruptcy exemption includes any account in which funds were gathered for retirement purposes. The Seventh Circuit reversed the District Court.

The United States Supreme Court granted certiorari to determine whether funds contained in an inherited IRA are considered “retirement funds” for purposes of the exemption. The Court affirmed the Seventh Circuit’s decision, and held that inherited IRA funds are not considered “retirement funds”. The Court made three key points. First, unlike the holder of a traditional IRA, an inherited IRA holder cannot invest additional funds in the account. Second, an inherited IRA holder must withdraw money from the account, regardless of when they retire. Third, an inherited IRA holder is capable of withdrawing the entire balance of an account at any time and for any reason without penalty.