For those in California who are preparing to file for personal bankruptcy, the safety of their retirement investments is often a top concern. In general, money placed within an IRA is classified as exempt from the bankruptcy estate. This means that those funds will not be used to repay creditors, and will remain in place throughout the entire process, due to the bankruptcy exemption.
However, certain actions can be taken that can put those funds at risk. For example, withdrawing funds from an IRA account and depositing them within a business account can lead to trouble. Once such case recently went before a court, and while the ultimate ruling was in the favor of the debtors, the example demonstrates the risk that comes with such a choice.
The couple withdrew nearly $40,000 from their IRA account and placed it within their business account. Those funds were then used for both business and personal expenses. When the couple filed for bankruptcy, they asked that the $24,000 that remained from this deposit be accepted as an exemption. The bankruptcy trustee disagreed, due to the fact that the funds were removed from the IRA and then commingled with personal and business funding.
The court ruled that those funds could still be counted as exempt within the bankruptcy, because the use of those funds could be construed as potentially beneficial to the couple in their retirement years. Furthermore, the court stated that decisions regarding bankruptcy exemptions should be made liberally and with an aim of being favorable to debtors. This, however, is not an approach universally taken by bankruptcy courts, and individuals should not assume that their own case will have the same result.
When considering how funds withdrawn from an IRA should be handled during a bankruptcy, individuals and couples should consult an attorney. Each set of circumstances is different, and there are cases in which the security of a bankruptcy exemption is not certain. Anyone in California who has withdrawn funds from an IRA and deposited them in a personal or business account should take steps to determine if these monies can be counted as an exemption, or if a different course of action should be taken.
Source: investmentnews.com, "IRA funds protected in bankruptcy", Ed Slott, Nov. 9, 2014