IRA Immediate Annuity Ruled Exempt from Bankruptcy Proceedings

Written by Hersh Stern Updated Saturday, April 20, 2024

In an important victory for buyers of immediate annuities using IRA funds, the Bankruptcy Appellate Court for the Eight Circuit recently upheld a decision that exempted a single premium immediate IRA annuity from the reach of creditors in a bankruptcy proceeding.

Retirement Account Bankruptcy Basics

The Bankruptcy Abuse Prevention and Consumer Protection Act was passed into law in 2005, stating that an individuals qualified retirement plans are protected by law during individual bankruptcy proceedings. In laymen terms, monies held within these plans, regardless of the amount, are protected against forced liquidation in the event of an individual bankruptcy filing.

Rollovers from protected qualified plans are also considered exempt. In addition, contributions up to a specified maximum into Traditional IRAs and Roth IRAs are also exempt. Despite these levels of protection afforded to qualified retirement plans, creditors often make their best efforts to show cause for taking such accounts, often citing transaction errors or anything else that may cause an account to lose its protection.

Reviewing the Facts of this Recent Court Case

In April, 2009, Joseph Miller purchased a $267,319.48 immediate annuity from Minnesota Life Insurance Company ("Securian") by rolling over money from a qualified retirement account. The Securian IRA annuity contract guaranteed 8 annual payments of $40,497.95, beginning a year later, in April, 2010.

Three years later, in June, 2012, Miller filed for Chapter 7 bankruptcy protection, listing among his protected assets, his Securian IRA annuity. At the date of filing, this asset had a value of $236,370.23. During the bankruptcy case’s proceedings, the trustee assigned to the case asserted that this annuity asset should not receive exemption protection, stating reasons as to why it didn’t qualify under the law. Miller appealed this decision.

The Appellate Court’s Decision

One of the key questions surrounding this particular case was whether the premiums placed in the annuity contract were fixed. The original court’s decision suggested that because the IRA immediate annuity was funded with a single premium the contract didn’t qualify for bankruptcy protection. The Appellate Panel disagreed.

The Appellate Panel stated that although the contract was funded with a single, fixed premium amount, this was the decision of Miller; it wasn’t required or suggested. Miller would have had the same option to purchase the contract in any dollar amount. As a result of this notion, the court’s stated that Miller did not in fact violate any section of the bankruptcy code.

Another point of contention in this case was whether the large premium paid into the annuity exceeded the IRA contribution limit for the given tax year. The court disagreed that any violation occurred here with a single premium deposit into an immediate annuity.

While challenges have and will be made to bankruptcy case specifics, the details outlined above suggest that qualified assets placed in good faith into single premium immediate IRA annuities will receive exemption protection during individual bankruptcy proceedings.

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US Bankruptcy Appellate Ruling USCourts.gov