- The Washington Times - Monday, April 4, 2005

From combined dispatches

The Supreme Court ruled yesterday that creditors may not seize Individual Retirement Accounts when people file for bankruptcy. The court’s decision protects the nest eggs of 45 million Americans.

The unanimous decision favors a bankrupt Arkansas couple fighting to keep more than $55,000 in retirement savings.

The ruling gives the same classification to IRAs as pensions, 401(k) plans, Social Security and other benefits tied to age, illness or disability that are protected under bankruptcy law.

IRAs should be classified in the same way because the benefits are tied to people’s age, the court said, referring to a 10 percent tax penalty imposed for withdrawals from IRA accounts before a person turns 60 years old.

“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 “Funds in a typical savings account, by contrast, can be withdrawn without age-based penalty.”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 is the only retirement plan available to the self-employed and small-business owners and is typically used by workers between jobs, according to seniors lobbying group AARP.

Unlike many other retirement plans, IRAs allow cash withdrawals for any reason at any time if holders 59 and younger pay a 10 percent penalty tax.

Some lower courts have ruled the withdrawal option makes IRAs different from other age-related benefits because people could make withdrawals at any time, regardless of age.

However, the Supreme Court ruling said IRA withdrawals by people younger than 60 are few, effectively making the account a benefit based on age.

“To the extent that someone is legitimately trying to save for retirement, this is potentially a good thing because it ensures their savings for retirement are secure,” said Michael Gutter, professor of family financial management at the University of Wisconsin-Madison.

However, he warned about potential abuses.

“My concern is that this will provide a shelter for someone to avoid bankruptcy law,” Mr. Gutter said.

Last year, 1.56 million people filed for personal bankruptcy, compared with 875,000 a decade earlier. Experts say much of that is being driven by people 55 and older who lose their jobs and cannot pay off debts.

The American Bankers Association said the Supreme Court ruling are expected to eliminate confusion that has prevailed in previous bankruptcy cases.

“It’s very helpful that the Supreme Court weighed in on the issue because there have been some inconsistent rulings in the lower courts,” said Laura Fisher, spokeswoman for the banking industry trade group.

The case involves Richard and Betty Jo Rousey of Berryville, Ark., who accumulated $55,000 in company-sponsored pension and 401(k) plans at Northrop Grumman Corp. before he took early retirement in 1998. When Betty Jo Rousey was laid off a month later, they rolled the funds over to IRAs.

The Rouseys have been unable to hold down new jobs, partly because of his chronic back pain, according to their lawyers. Richard, 60, and Betty Jo, 57, now live on $2,000 a month.

Under bankruptcy law, the retirement savings will 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.”

The Consumer Federation of America said the Supreme Court ruling is consistent with previous government policy.

“Congress and the courts have typically decided that retirement savings are sacrosanct,” said Travis Plunkett, legislative director for the Consumer Federation of America. “People should be protected in their retirement, regardless of whether they declare bankruptcy.”

• Staff writer Tom Ramstack contributed to this report.

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