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The 8th Circuit Court of Appeals has ruled that retirement funds rolled over from an Individual Retirement Account to purchase an annuity are exempt from the bankruptcy estate.  In re Miller (No. 13-3682).  Prior to filing bankruptcy, Joseph Miller, rolled over $267,319 from his IRA account to purchase an annuity contract from Minnesota Life Insurance Company.  The annuity was to pay the debtor $40,497.95 for the next 8 years.  Although it is clear that funds held in IRA accounts are exempt, the trustee argued that the funds lost that protected status when the annuity was purchased because the annuity did not meet the tax qualification rules of Internal Revenue  Code Section 408.

Section 522(b)(3)(C) of the Bankruptcy Code provides that funds which are exempt from federal taxation are thereby made exempt from the claims of creditors.  Such funds are not part of the “bankruptcy estate.”

The Chapter 7 Trustee in Miller argued that the rollover of funds from the IRA account exceeded the $6,000 annual premium limit imposed by IRC 408(b)(2)(A), and hence the fund were no longer exempt from taxation or protected in bankruptcy.  The 8th Circuit rejected this argument by pointing out that there is a difference between a “rollover contribution” and a “premium payment.”  The Court ruled that “a rollover contribution is distinct from a premium.”

In a similar case, the Massachusetts bankruptcy court also ruled that funds rolled over to an IRA annuity are exempt from the bankruptcy estate under 522(b)(3)(C).  In re LeClair, 461 B.R. 86 (Bankr. D. Mass. 2011).

Important facts about IRA Accounts in Nebraska Bankruptcy Cases:

  • In addition to the federal retirement exemption statute of 522(b)(3)(C), Nebraska has its own exemption statute protecting retirement funds.  Neb. Rev. Stat. 25-1563.01.  So, if the federal exemption does not apply it may be possible to protect the retirement account under Nebraska’s law.
  • Inherited IRA accounts are not protected in bankruptcy.
  • IRA accounts which allow the debtor to borrow against the account may be at risk in bankruptcy.

If in Doubt file Chapter 13:

Sometimes it is difficult to determine if an account is exempt from federal taxation and, as a result, whether the account is protected in bankruptcy.  Debtors with sizable retirement savings simply cannot risk losing those funds in Chapter 7.  Keep in mind, Chapter 7 trustees are paid on commission–they earn bonus income if they uncover unprotected assets worth selling.  If there is any real doubt as to whether an retirement is account is protected in Chapter 7, the debtor is best advised to file for Chapter 13 and agree to pay back some of their debt over a 3 to 5 year payment plan. Chapter 13 trustees are not empowered to liquidate assets and payment plans are typically based on what a debtor can really afford to pay back.  If in doubt, file 13.


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