NEW YORK, NY - The Supreme Court ruled on Monday April 4, 2005, that creditors may not seize Individual Retirement Accounts when people file for bankruptcy.

The 9-0 decision, authored by Justice Clarence Thomas, reversed an 8 th Circuit Court of Appeals decision, thus allowing a bankrupt Arkansas couple to keep more than $55,000 in retirement savings. As a result, IRAs now join pensions, 401(k)s, Social Security and other benefits tied to age, illness or disability that are afforded protection under bankruptcy law.

"IRAs should not be treated any differently because the benefits are tied to people's age, the court said, citing a substantial tax penalty that is imposed for withdrawals before a person turns 60. That penalty erects a substantial barrier to early withdrawal," Justice Clarence Thomas wrote for the court. "Funds in a typical savings account, by contrast, can be withdrawn without age-based penalty."

IRAs allow most investors to contribute up to $4,000 in earned income annually. 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 lower court ruled that makes IRAs different, based upon an 8 th Circuit precedent, because people could make withdrawals at any time, regardless of age.

In the ruling, however, Justice Thomas noted IRA withdrawals by those younger than age 60 are few, effectively making the account a benefit based on age. The debtors, Richard and Betty Jo Rousey of Berryville, Ark., accumulated $55,000 in company-sponsored pension and 401(k) plans at Northrop Grumman Corp. before Mr. Rousey took early retirement in 1998. When Mrs. Rousey lost her job later that year, they rolled the funds over to IRAs. The Rouseys were unable to hold down new jobs, in part due to Mr. Rousey's chronic back pain, according to their lawyers. According to the lower court opinion, the debtors now live on $2,000 a month.

Under bankruptcy law, the retirement savings won't be given blanket protection. A separate provision in the law shields the assets only to the extent the money is "reasonably necessary for the support of the debtor and any dependent."

Michael L. Moskowitz and Richard E. Weltman are members of Weltman & Moskowitz, LLP, having offices for the practice of law in New York and New Jersey. The firm handles cases involving bankruptcy and creditor's rights, business litigation, technology law, real estate, and other dispute resolution and transactional matters. They can be reached at 212.684.7800 or 201.794.7500 or by e-mail.