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The
President recently signed the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005. This act brings good news for taxpayers concerned
about protecting their retirement assets in bankruptcy. This act will apply
to filings after October 17, 2005. For those filings before October 17,
2005, there is a Supreme Court decision that outlines the requirements for
an IRA to be protected. In the case of an IRA, this means the difference
between explicit protection of $1 million in IRA assets and protection only
of a reasonably necessary amount.
In
the decision of Rousey V. Jacoway, the Court held that IRA assets were
protected if they meet three requirements. These requirements are the right
to receive payment must be from a stock bonus, pension. Profit sharing plan,
annuity or similar plan or contract; the right must be “on account of
illness, disability, death, age, or length of service” and the right may
be exempted only to the extent that it is reasonably necessary to support
the debtor or his or her dependants.
The
Court’s age requirement state that applicability of the protection stemmed
from the fact that a penalty would be incurred if the funds were withdrawn
before the debtor reached age 59 and a half. This caused people to wonder if
Roth IRAs were included since there is no tax or penalty on withdrawals up
to the amount of after tax contributions.
Additionally
other courts have decided that 403(b) accounts would be protected from
creditors. If the debtor’s plan states that the debtor’s “interests
may not be sold, used as collateral for a loan, given away, or other wise
transferred” Further interpretation of the court stated that the language
should indicated that the creditors could not “attach, garnish, or
otherwise interfere with the account.
The
Bankruptcy Act extends bankruptcy protection to all tax-favored retirement
savings plans. For IRA accounts there is a $1 million limitation (as
adjusted for inflation) on the protection except for IRAs funded by
rollovers from qualified plans. This dollar amount may be increased “if
the interests of justice require.” However retirement plan loans cannot be
discharged in bankruptcy.
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