While protection from creditors for “retirement funds” is available when filing for bankruptcy, the Supreme Court ruled on June 12, 2014, that inherited individual retirement accounts (IRAs) are not protected from creditors during bankruptcy proceedings as they are not “retirement funds”.
Inherited IRAs differ from traditional IRAs in multiple ways. An individual who inherits the IRA is not a contributor, and is able to withdraw any amount from the IRA without penalty, whereas the original account holder may not withdraw money without penalty before age 59 ½.
In its decision, the Supreme Court stated that “reference [in the Bankruptcy Code] to ‘retirement funds’ is therefore properly understood to mean sums of money set aside for the day an individual stops working”. This definition makes clear that protection from creditors in the bankruptcy setting is only available to those IRA owners who are the contributors of the funds, not those IRA owners who inherited them because of the death of an IRA owner.