Minnesota bankruptcy court ruling protects IRA annuity from creditors

Many bankruptcy trustees have begun targeting the retirement accounts of those who file bankruptcy, given that many people have funds in such accounts. However, these funds have rigorous protections under federal bankruptcy laws. Trustees often believe that they can find prohibited transactions regarding these accounts and can then make the funds available to creditors. However a recent decision from an Eighth Circuit Bankruptcy appellate court clarified the extent of the protections for retirement accounts. On November 4, 2013 the Bankruptcy Appellate Court for the Eighth Circuit issued a decision upholding a Minnesota Bankruptcy Court's holding that a man filing bankruptcy could protect his IRA from creditors, even though he had purchased it with a single premium from an earlier retirement account.

Protections for retirement accounts

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 modified bankruptcy law so that it included several protections for retirement accounts. Under the law, people can totally shield company retirement accounts such as SEP IRAs and SIMPLE IRAs from creditors when they filed bankruptcy, no matter the amount in the account. Any money that people rolled over from these company IRAs into other IRAs was also protected.

People could also shield direct contributions to IRAs and Roth IRAs up to $1 million, a limit which adjusted for inflation over time under the law.

IRA funded with an annuity

The case before the court stemmed from a dispute from a man filing bankruptcy and the trustee in his case about whether his IRA was an exempt asset. In April 2009, he had purchased an individual retirement annuity from an insurance company with $267,319.48 in funds rolled over from his other retirement accounts. In June 2012, the man filed for Chapter 7 bankruptcy. He listed his IRA as an exempt asset, but the trustee in his case argued that an annuity did not have the same protections as other retirement accounts because the man's annuity did not meet the tax code's requirements for an individual retirement annuity. The trustee said that the law required annual premiums for an account to qualify, which this man's account did not have. The Bankruptcy Court sided with the man, but the trustee appealed.

The appellate court disagreed with the trustee, saying that those who interpret the tax code on a regular basis did not require individual retirement annuities to have annual payments to keep their tax-deferred status, so the court would not require it to maintain exempt asset status in bankruptcy.

Speak with an attorney

As the retirement account case demonstrates, bankruptcy law can be incredibly complex. Those who are considering bankruptcy as a way to regain their financial footing should not try to navigate bankruptcy laws alone. If you are thinking of filing bankruptcy, talk to a skilled bankruptcy attorney with proven experience protecting clients' assets to the fullest extent allowed by the law.