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Court shields IRAs from creditors

Justices decide bankruptcy law protects accounts

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Associated Press / April 5, 2005

WASHINGTON -- The Supreme Court gave bankrupt Americans another layer of financial protection yesterday, ruling that creditors cannot seize Individual Retirement Accounts.

The justices said IRAs should join pensions, 401(k) accounts, Social Security, and other benefits tied to age, illness or disability that are protected under bankruptcy law.

Justice Clarence Thomas, writing for the court, said a bankrupt Arkansas couple was entitled to keep more than $55,000 in retirement savings from creditors. He reasoned that IRAs are benefits tied to a person's age under federal law because a penalty is imposed for withdrawals before age 60.

The ruling affects 16 states and the District of Columbia, which do not have their own laws protecting IRAs. The other 34 states have separate laws on bankruptcy protection; a few, including New York, California and Iowa, have language mirroring the federal statute.

IRAs let most investors contribute up to $4,000 annually to a fund that grows tax-free until withdrawals.

IRAs permit cash withdrawals for any reason at any time, but holders 59.5 and younger must pay a 10 percent penalty. Lower courts had ruled the fact that investors can make IRA withdrawals at any time made IRAs more like savings accounts, which are unprotected from creditors by bankruptcy law.

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