U.S. Supreme Court Rules IRA's Protected In Bankruptcy

On April 4, 2005, the U.S. Supreme Court ruled that individual retirement accounts (IRAs) are protected from creditors in bankruptcy. Until recently only qualified plans such as 401(k) plans were protected from creditors under federal law. Individual retirement plans did not have the same protections under federal law and were governed by state laws which varied. For these reasons, many people felt that an IRA was not as "safe." Rousey v. Jacoway reversed the 8th Circuit Court of Appeals holding that IRAs can be exempt, thus offering the same protections to IRAs as afforded to qualified plans.

On April 20, 2005, President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  Included in this new law are provisions affecting employee retirement plans.  Under this law, not only are qualified plans protected as well as IRAs, but the protection will also extend to public sector retirement plans, section 457 plans and section 403(b) plans.  While the U.S. Supreme Court did not put a limit on the IRA assets that are protected, the new law, which goes into affect October 14, 2005, puts a $1 million ceiling on IRA assets except those assets which represent amounts rolled over from a qualified plan such as a 401(k) plan.  The new law will also protect employee payroll deduction contributions made to health or cafeteria plans and held by the employer even if such amounts have not been deposited in a separate trust fund.