South-Western Legal Studies in Business

IRAs and Other Pension Funds Exempt from Bankruptcy

Supreme Court held that IRAs and other funds due to be paid under a plan or contract, based on age or some other specific factor, are protected for the benefit of the debtor in case of bankruptcy.

Topic Bankruptcy
Key Words

Exemptions; IRAs

C A S E   S U M M A R Y

When the Rouseys both left their employment at Northrup Grumman, they took their employer-sponsored pension funds in lump sums and deposited the money into two IRAs. The funds remained untouched in the accounts by the time they filed Chapter 7 bankruptcy several years later. The Rouseys sought to shield their IRAs from creditors. The trustee claimed the IRAs were not exempt from distribution to creditors and the bankruptcy judge agreed. The Eighth Circuit Bankruptcy Appellate Panel and the Eighth Circuit Court of Appeals also agreed. The Rouseys appealed.


Reversed and remanded. The IRAs are “plans or contracts” within the meaning of the exemption statute. The Bankruptcy Code exempts payments that will be come available “on account of” age. That is, the IRAs are not to be touched, without incurring a penalty, before age 59-and-a-half. This exemption applies to any stock bonus, pension, annuity, or similar plan or contract that is tied to age, death, disability, illness, or length of service.


Rousey v. Jacoway, 125 S.Ct. 1561 (Sup. Ct., 2005)

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