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WASHINGTON, April 4, 2005 - The Supreme Court unanimously ruled
that under federal bankruptcy law, Individual Retirement Accounts
(IRAs) are protected from creditors in bankruptcy proceedings. This
means that the savings for the estimated 45 million Americans who
hold IRA accounts today, are safeguarded under law just as 401k
plans, pensions, social security and other benefits tied to age,
illness, disability or death.
The decision for the case Rousey v. Jacoway, 03-1407, written by
Justice Clarence Thomas states that IRAs were a payment "on
account of age" because account holders must pay a 10 percent
penalty if they withdraw funds before they are 59 ½ years
old.
The lower courts, argued that because people can make early withdrawals
from IRAs, it makes them more like savings accounts, which are not
protected from creditors under bankruptcy law. Thomas noted, however,
that IRA withdrawals by those younger than 60 are few, effectively
making the account a benefit based on age. "That penalty erects
a substantial barrier to early withdrawal" Thomas wrote "The
deterrent to early withdrawal it creates suggests that Congress
designed it to preclude early access to IRAs." This ruling
comes at a time when there are an estimated 1.6 bankruptcy filings
per year compared to 875,000 a decade ago, when these laws were
not in effect.
This new ruling affects people living in Washington, D.C. and 16
other states including: Alaska, Arkansas, Connecticut, Hawaii, Michigan,
Minnesota, New Hampshire, New Jersey, New Mexico, Pennsylvania,
Rhode Island, South Dakota, Texas, Vermont, Washington, and Wisconsin.
These 16 states do not have their own laws protecting retirement
savings. The remaining 34 states including: New York, California
and Iowa have language that mirrors the federal bankruptcy statute.
The new decision on April 4th overturned a 2003 ruling by the US
Court of Appeals for the Eighth Circuit in St. Louis, Missouri.
For further information on this decision or to read the full text
of the statute go to www.aarp.org
or www.supremecourtus.gov.
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