On April 4, 2005, the United States Supreme Court released its unanimous decision in the case of
Rousey v. Jacoway, considering whether a bankrupt Arkansas couple could shield their retirement savings
in the form of IRAs. The Rouseys, who had previously rolled over their funds from a company-sponsored
pension and 401(k) plans into IRAs, claimed an exemption for their IRAs when they filed for bankruptcy in
2001.
The U.S. Supreme Court overruled the lower courts’ decisions and held that the Rouseys can
exempt IRA assets from the bankruptcy estate because the IRAs fulfill both of the requirements at issue in
the case. Section 522(d)(10)(E) of the Bankruptcy Code provides, in relevant part, that a debtor may
withdraw from the bankruptcy estate his right to receive payment “on account of … age” from “a stock
bonus, pension, profit-sharing, annuity, or similar plan or contract.” The U.S. Supreme Court found that the
Rouseys’ right to payment from IRAs is causally connected to their age, due to the fact that a 10 percent
tax penalty applies to withdraws from IRAs made before the accountholder turns 59 ½. Contrary to the
trustee’s assertions and the findings of the lower courts, the U.S. Supreme Court determined that this tax
penalty is substantial and therefore limits the Rouseys’ right to payment of the balance of their IRAs. As
this condition is removed when the accountholder turns 59 ½, the Rouseys’ right to the balance of their
IRAs is a right to payment “on account of” age. Further, the U.S. Supreme Court agreed with the Rouseys’
contention that IRAs are similar to the traditional retirement plans specified in section 522(d)(10)(E) of the
Bankruptcy Code. Those plans, like the Rouseys’ IRAs, provide a substitute for wages and are not mere
savings accounts.
It is important to keep in mind that this exemption pursuant to section 522(d)(10)(E) of the
Bankruptcy Code applies only to debtors in those states that have not opted out of the federal exemptions.
This decision will have effect in those states that have opted out of the federal exemptions only if their
exemption statutes track federal law.
If you should have any questions regarding this Client Advisory or would like to follow-up with an
appointment with one of our bankruptcy attorneys, please feel free to contact us at any time. Ronald E.
Gold, Esq. and Douglas L. Lutz, Esq. are Members of the Financial Restructuring Group in the Cincinnati
office of Frost Brown Todd LLC (513-651-6800) (www.frostbrowntodd.com). Mr. Gold can be reached at
rgold@fbtlaw.com. Mr. Lutz can be reached at dlutz@fbtlaw.com.