Q. Is an IRA protected from Bankruptcy for the Original Owner?

A. The short answer is “Yes”. In 2005, the Bankruptcy Abuse Prevention and Consumer Protection was enacted. Under that law, all types of IRAs are bankruptcy protected. Typically if an individual files for bankruptcy protection, he/she can keep the IRA (regardless of what kind of IRA it is) from his/her creditors in bankruptcy court.

Q. Is an inherited IRA protected from Bankruptcy?

A. The short answer is “Maybe”. In a 2010 Minnesota case a woman filed for bankruptcy only four months after she had inherited an IRA. The Minnesota bankruptcy court ruled that “transferred amounts did not lose their character as retirement funds.”

Contrast the Minnesota bankruptcy court with an Eastern District of Texas bankruptcy court ruling also in 2010. In that case the court held that the funds in an inherited IRA are not intended for retirement and therefore were not protected from creditors in bankruptcy proceedings.

So what should an IRA owner do to protect his IRA from the potential of an heir filing for bankruptcy. Probably the best thing one can do is to name an IRA Inheritance or Inheritor’s Trust as the beneficiary – some may even call it an IRA Beneficiary Trust with someone other than the heir as the trustee.

A knowledgeable estate or trust lawyer can discuss this with you. Attorneys who practice in this area of law can help IRA owners make the correct decision with their IRA.