Inherited IRAs lack federal bankruptcy protection, Supreme Court rules

Many heirs assume an inherited IRA carries the same legal protection as the retirement account that created it. The U.S. Supreme Court said otherwise, ruling unanimously on June 12, 2014, in Clark v. Rameker that inherited IRAs are not “retirement funds” for purposes of the federal bankruptcy exemption.

The case involved roughly $300,000 in an inherited IRA held by Heidi Rameker and William J. Clark. Writing for the Court, the justices said inherited IRAs differ from ordinary IRAs in three crucial ways: beneficiaries can withdraw the money at any time, cannot make new contributions, and must take required minimum distributions. That structure, the Court reasoned, makes the account more like an available asset than a protected nest egg.

In Chapter 7 bankruptcy, that distinction matters. The U.S. Department of Justice U.S. Trustee Program says a Chapter 7 trustee takes over property that can be sold or converted to money to pay creditors. Under Clark, money in an inherited IRA can be pulled into the bankruptcy estate rather than left outside it, even though the original owner’s IRA may have enjoyed federal protection.

Tax rules reinforce that divide. The Internal Revenue Service says beneficiaries of retirement-plan and IRA accounts after the owner’s death are subject to required minimum distribution rules, and those rules vary depending on whether the beneficiary is a spouse or non-spouse. The IRS also says the minimum distribution rules apply to original account holders and their beneficiaries, underscoring that inherited accounts are governed by a different legal framework than the saver’s own retirement money.

Outside bankruptcy, protection is less uniform and can hinge on state law, the type of debt and whether a creditor has already obtained a judgment. The Consumer Financial Protection Bureau says most creditors generally need a court judgment before they can garnish wages or benefits, but collection rules still vary by the asset and the collection method. Some state laws offer additional protection, yet many do not extend IRA exemptions to inherited accounts.

For families with large inherited balances, unpaid debts or property in a state with narrow exemptions, the risk is real. The central lesson from Clark is stark: an inherited IRA is not automatically a protected retirement asset, and once the owner dies, federal bankruptcy law leaves a major gap.