In the case of Rousey v. Jacoway, the Supreme Court, in a unanimous opinion, has given Individual Retirement Accounts (IRAs) virtually the same protection from creditors now given to 401(k)s, pensions and Social Security benefits.
IRAs should not be treated any differently because the benefits are tied to people's age, the court said, citing a substantial tax penalty that is imposed for withdrawals before a person turns 60.
"That penalty erects a substantial barrier to early withdrawal," Justice Clarence Thomas wrote for the court. "Funds in a typical savings account, by contrast, can be withdrawn without age-based penalty."
IRAs allow most investors to contribute up to $4,000 in earned income annually to a fund that grows tax-free until withdrawals.
It would stand, by this reasoning, that SEP IRAs and Simple IRAs would also enjoy the same protection. These plans are "super IRAs" designed for self-employed people--and any employees they may have- -who have no access to a full-blown 401(k).
The contention of creditors in this case was that IRAs allow for early withdrawal. But the justices ruled that because of the taxes taken from and withdrawal, along with the substantial (10%) penalty for withdrawals before age 59 1/2, IRAs are clearly a benefit that is based on age.
Under bankruptcy law, however, retirement saving plans are not be given blanket protection:
A separate provision in the law shields the assets only to the extent the money is "reasonably necessary for the support of the debtor and any dependent."
This is a big deal. Many people who have retired roll their 401(k)--and sometimes pension--funds into an IRA, which typically feature a wider range of investment options. Standard 401(k)s generally limit the amount and type of investments available. What the Court is saying is that retirement funds controlled by individuals have virtually the same stature as institutional programs. It has also removed a major deterrence for ex-employees to take lump sum distributions to an IRA.
In giving individual accounts this protection, the Court has in some ways given a shot in the arm for Bush's plan to overhaul Social Security. One of the criticisms of the president's plan was the vulnerability of individual accounts to bankruptcy proceedings as well as market fluctuations. This ruling eliminates one of the major stumbling blocks to individual accounts.
With the punitive and draconian bankruptcy law recently passed, the Court has rightly protected what for many Americans is the only retirement funds available outside of Social Security.
Comments