Don’t Assume That IRAs Are Exempt in Bankruptcy

Play Podcast IRAs May Not Be Safe in Bankruptcy

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Sometimes it’s said that the bankruptcy code is filled with landmines. And to a certain extent that’s true. Florida bankruptcy lawyer Eric Lanigan wants to go over one of those landmines and that’s the IRA exemption that’s usually expected in bankruptcy.

You can learn more about the issue in a video on the LaniganPL YouTube Channel entitled: “IRAs May Not Be Safe in Bankruptcy.”

The general rule of thumb, Eric explains, is that the IRAs are exempt. And almost anything you read will say, ‘don’t worry about your IRA because it’s exempt from the claims of creditors in bankruptcy.’ 

But if you read the code though, what the code says is that if an IRA has received an IRS determination letter then there is a presumption that it is exempt. And every lawyer knows that there is a lot of danger in that word presumption because it immediately tells you that there is some ways that it might not be exempt.

The Case for IRA Exemption Review

And a good example of that is in a recent case involving a Merrill Lynch IRA and there’s approximately four or $500,000 dollars in this IRA. And the bankruptcy trustee in that particular case went into a boilerplate language that Merrill Lynch has a customer sign when they open an IRA. And they found in it language that to the extent that if that customer were to owe Merrill Lynch money on any other brokerage account for instance if there was a margin call on a brokerage account that they had in their individual name, that Merrill Lynch could cover that debt by taking money out of that IRA.

The trustee successfully argued that that was a prohibited transaction and therefore the IRA should not be exempt. And they won. And they took it to the appellate court and they won again.

So a caution to everyone that has an IRA to go in and find out if the brokerage firm or the sponsor of the IRA has any type of lien rights on the account and if they do you need to move that IRA immediately.

If you’re not sure, come into the Winter Park Florida offices of Lanigan and Lanigan. Meet wit Eric Lanigan and Roddy Lanigan who will take a look at your overall bankruptcy, your documents and will take the time to analyze your financial situation.