Today the Supreme Court, in a unanimous decision in Clark v. Rameker, 2014 WL 2608860 (U.S., June 12, 2014) (case no. 13-299), held that an inherited IRA is not exempt under Code § 522(b)(3)(C) or § 522(d)(12) because the funds in an inherited IRA are not “retirement funds” within the meaning of those provisions, each of which exempts “retirement funds to the extent those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code.” Accordingly, the court affirmed In re Clark, 714 F.3d 559 (7th Cir., April 23, 2013) while abrogating In re Chilton, 674 F.3d 486 (5th Cir., March 12, 2012) and other cases that allowed the exemption of inherited IRAs.
The reference to “retirement funds” in these provisions is properly understood, the Court said, to mean sums of money set aside for the day an individual stops working. Three legal characteristics of inherited IRAs led the Court to conclude that funds held in such accounts are not objectively set aside for the purpose of retirement. First, the holder of an inherited IRA may never invest additional money in the account. Second, holders of inherited IRAs are required to withdraw money from such accounts, no matter how many years they may be from retirement. Finally, the holder of an inherited IRA may withdraw the entire balance of the account at any time—and for any purpose—without penalty. Allowing the exemption of an inherited IRA, the Court said, would convert the Bankruptcy Code’s purposes of preserving debtors’ ability to meet their basic needs and ensuring that they have a “fresh start” into a “free pass.”
The case involved a “non-spousal” inherited IRA, as the debtor inherited the IRA from her mother. The Court noted that a surviving spouse has the option of rolling over the funds from a deceased spouse’s IRA into the surviving spouse’s own IRA. The Seventh Circuit’s opinion was explicitly limited to a “non-spousal” inherited IRA, and, while the Supreme Court’s opinion does not reiterate this limitation, the opinion presumably does not apply to funds inherited by a spouse and rolled over into the spouse’s own IRA, as such funds are no longer in an “inherited IRA,” which is a specific type of IRA recognized by the IRS.