ARTICLE: I. The Lesson to Be Learned:
Despite a long line of precedent broadly construing a debtor's exemptions, the Court will break from a textualist plain-meaning statutory construction when such a construction would undermine what the Court believes to be congressional intent in establishing bankruptcy exemptions. Instead, the Court will interpret the words of the statute in a manner to reinforce perceived congressional intent and purpose. II. Summary of Holding: In a unanimous opinion authored by Justice Sotomayor, the Court held that an individual retirement account (an "IRA") that is inherited prepetition from a non-spouse does not fall within the scope of the "retirement funds" exemption in Bankruptcy Code section 522(b)(3)(C) [an annotated version of this statute is available to lexis.com subscribers] . Emphasizing the unique legal characteristics of inherited IRAs, the Court concluded that funds held in an inherited IRA are not "retirement funds" because they are not funds "set aside for the day when an individual stops working." Clark v. Rameker, 573 U.S. __, 2014 U.S. LEXIS 4166 at *9-10 [an enhanced version of this opinion is available to lexis.com subscribers. The Court reasoned that exempting such funds from the bankruptcy estate would be inconsistent with the purposes of the Bankruptcy Code's exemption scheme. III. Legal Background: A. Overview of Retirement Accounts There are three kinds of retirement accounts that are relevant to the Court's holding in Clark: traditional IRAs, Roth IRAs, and inherited IRAs. Traditional and Roth IRAs are personal savings vehicles that provide certain tax advantages to incentivize individuals to save for retirement. Contributions to a traditional IRA are generally tax-deductible, see 26 U.S.C. § 219(a) [annotated version], and assets held in a traditional IRA are not taxed until they are distributed, see 26 U.S.C. § 408(e)(1) [annotated version]. Roth IRAs operate in reverse: the owner's contributions are not tax-deductible, but qualified distributions are tax-free. See 26 U.S.C. §§ 408A(c)(1), (d)(1). The owner of a traditional or Roth IRA may begin taking penalty-free withdrawals at the age of 59½, and must begin to withdraw funds at age 70 & 1/2;. See, e.g., Rousey v. Jacoway, 544 U.S. 320, 323 (2005) [enhanced version]. When the owner of a traditional or Roth IRA dies, the owner's interest in the IRA passes to a beneficiary. If the named beneficiary is not the spouse of the decedent, then the account is treated as an inherited IRA under the Internal Revenue Code. See 26 U.S.C. § 408(d)(3)(C)(ii). Inherited IRAs are treated differently than traditional and Roth IRAs under the Internal Revenue Code. For example, the beneficiary of an inherited IRA cannot make contributions to the IRA. See Clark, 2014 U.S. LEXIS 4166, at *7 (citing 26 U.S.C. § 219(d)(4)). Moreover, the beneficiary may elect to receive distributions from the account immediately without incurring any tax penalty, and must either withdraw the entire amount within five years of the original owner's death or take minimum annual distributions. Clark, 2014 U.S. LEXIS 4166, at *7 (citations omitted) [footnotes omitted].
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