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Court ponders IRAs bankruptcy shield

THURSDAY, DEC. 2, 2004

WASHINGTON — The Supreme Court considered Wednesday how much retirement savings people can shield when they file for bankruptcy, an important question as more Americans go into debt.

The justices heard arguments in the case of a bankrupt Arkansas couple seeking to keep their Individual Retirement Account.

Bankruptcy law already protects pensions, 401(k)s, Social Security and other benefits tied to age, illness or disability. Most justices appeared reluctant to allow the seizure of all the money in IRAs, a nest egg used by millions of Americans, though Justice Sandra Day O’Connor offered that some might be taken to repay debts.

IRAs, which can be opened by anyone regardless of employment, allow investors to contribute up to $3,000 annually to a fund that grows tax-free until withdrawals. It is the only retirement plan available to the self-employed, small business owners and workers between jobs.

Unlike many other retirement plans, IRAs permit cash withdrawals for any reason at any time so long as holders 59 1/2 and younger pay a 10 percent penalty tax.

“The statute says the right to receive payment is on ‘account of age,”’ Justice Anthony Kennedy said. “If a client can take the money out at any time, why is it on account of age?”

But Justice Stephen Breyer, backed by Justices David H. Souter, Ruth Bader Ginsburg, John Paul Stevens and O’Connor, noted more than 98 percent of IRA investors don’t make withdrawals until age 60.

“It’s called an Individual RETIREMENT Account,” Breyer said. “It’s based on retirement, which is clearly on account of age.”

The stakes in the case are high. Last year, more than 1.6 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 over who lose their jobs and can’t pay off debts.

“Older Americans who lose their IRAs in bankruptcy will have a sharply reduced ability to support themselves in their retirement years,” AARP wrote in its friend-of-the-court filing seeking IRA protection. “Rebuilding retirement savings is a daunting task for anyone, and it is particularly difficult for older Americans.”

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 Mrs. Rousey was laid off a month later, they rolled the funds over to an IRA.

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


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