Are IRA Withdrawals Safe From Creditors?
Until recently, the answer would have been a fuzzy, "Uh maybe. I don't know."
Now the answer is a resounding YES.
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ithdrawals from an IRA account are exempt--regardless of how the judgment debtor chooses to use the withdrawal or the age at which the debtor makes the withdrawal (i.e. premature distributions before age 591/2).
In Kinlaw v. Harris the North Carolina Court of Appeals ruled that a defendant may withdraw funds from an IRA and use those funds "in the same manner as if there were no judgment against the Defendant." Thus the funds representing the judgment debtor's withdrawal from his IRA remained exempt.
An "exempt" asset is one that cannot be seized by a creditor to satisfy a judgment. The type and amount of assets that are exempt from creditors' claims varies by state. Some states do not exempt IRAs at all. Others, like California, only exempt IRAs to the extent reasonably necessary to support the debtor and his family.
The Kimball court noted that the tax consequences, if any, of the withdrawal had no bearing on whether the withdrawal was exempt. In this case the withdrawal was from a traditional IRA, so the debtor had to pay ordinary income tax and, because the debtor was under age 59and 1/2, an early withdrawal penalty of 10% of the amount of the withdrawal.
Had the debtor's IRA been a Roth IRA, which is funded with after-tax dollars, not a traditional IRA, which is funded with pre-tax dollars, subject to certain timing conditions, the debtor could have withdrawn the amount of his contribution without any penalty and free of any additional income tax.
This is a new and important asset protection planning tool. Under North Carolina law, IRAs are exempt from creditors' claims without regard to whether the IRA is necessary to support the debtor's family. Plus, unlike some states' exemptions as well as the federal bankruptcy exemptions, North Carolina DOES NOT LIMIT the exemption to a particular dollar amount. Instead, any amount in an IRA (traditional or Roth) is exempt. Now, any withdrawal from an IRA is exempt as well.
