In Jones v. McGreevy, decided on January 11, 2022, the Pennsylvania Superior Court held, inter alia, that, unlike other types of retirement accounts, an inherited individual retirement account is not protected from creditors.
Pennsylvania law exempts certain property from judgment execution, including $300 of any type of property, plus clothing, bibles, school books, uniforms, and certain insurance proceeds. In addition, 42 Pa.C.S. § 8124(b) exempts of certain retirement funds and accounts from judgment execution. As issue in Jones was whether Section 8124 exempts retirement funds or accounts that are inherited from the original owner. Since the statute is unclear and no Pennsylvania court had ever addressed the issue, the Court took direction from the United States Supreme Court’s decision in Clark v. Rameker, 573 U.S. 122 (2014), which interpreted a “substantially similar” exemption provision in the United States Bankruptcy Code.
Before discussing the Clark case, it is important to understand the differences between a regular IRA and an inherited IRA. With a regular IRA, the owner can usually add more money to the fund to save for retirement but generally cannot withdraw money before reaching retirement age without having to pay a penalty to the IRS. However, with an inherited IRA, the individual who inherited it cannot add more money to it, and does not have to be of retirement age to withdraw the funds, but must withdraw all of the funds within ten (10) years of inheriting.
Those differences were important to the courts in Clark and Jones. In Clark, the Supreme Court held that the determining factor regarding whether an account qualifies as “retirement funds” (and is therefore exempt from being taken by judgment creditors) is whether the account “is one set aside for the day when an individual stops working.” Given the differences between a regular IRA and an inherited IRA, the Supreme Court in Clark held that inherited IRAs are not “retirement funds” and, in the recent Jones decision, the Pennsylvania Superior Court agreed with regard to Pennsylvania’s exemption statute.
As a result, while most retirement funds will be protected from creditors, funds in an inherited IRA will not be protected because they lose their protection as “retirement funds” upon being inherited.