Inherited IRAs are generally not protected from creditors. In 2014 the Supreme Court held that an inherited IRA is not a “retirement fund” under the Bankruptcy Code, which means a non-spouse beneficiary’s account can be reached by a bankruptcy trustee, and outside bankruptcy the answer depends on the beneficiary’s state of residence. A surviving spouse can sidestep the problem by rolling the account into their own IRA, and other beneficiaries can often preserve protection through a properly drafted trust named as the IRA beneficiary before the original owner dies.
Why Inherited IRAs Lost Their Federal Shield
In Clark v. Rameker (2014), the Supreme Court unanimously held that funds in an inherited IRA do not qualify as “retirement funds” under 11 U.S.C. 522(b)(3)(C), the bankruptcy exemption that protects tax-favored retirement accounts.1Justia U.S. Supreme Court Center. Clark v. Rameker, 573 U.S. 122 (2014)2Office of the Law Revision Counsel. 11 U.S. Code 522 – Exemptions The petitioners had tried to shield roughly $300,000 in an inherited IRA from their Chapter 7 estate. The Court said no.
Justice Sotomayor pointed to three features that separate an inherited IRA from the beneficiary’s own retirement savings:
- The beneficiary cannot make new contributions to the account.
- The beneficiary must take distributions regardless of age or retirement status.
- Distributions are not subject to the usual 10% early-withdrawal penalty that applies before age 59½.
Read together, those features told the Court that the money is available for current spending, not locked away for the beneficiary’s own retirement. A bankruptcy trustee can therefore reach the full balance of a non-spouse inherited IRA to pay creditors.1Justia U.S. Supreme Court Center. Clark v. Rameker, 573 U.S. 122 (2014)
The Surviving Spouse Rollover
A surviving spouse has an option no other beneficiary gets: rolling the inherited IRA into their own IRA.3Internal Revenue Service. Retirement Topics – Beneficiary Once the rollover is complete, the account is no longer an “inherited IRA” at all. It is the spouse’s own retirement account, and the federal bankruptcy exemption for retirement funds applies again, along with whatever state protection covers the spouse’s personal IRA.
The cleanest way to do this is a direct trustee-to-trustee transfer, which avoids withholding and accidental taxable events. If you are a surviving spouse with any concern about future creditor exposure, completing that rollover promptly is the single most protective step available. Non-spouse beneficiaries cannot use it. Their accounts must stay titled as inherited IRAs, which is exactly the status the Supreme Court found unprotected.
Inherited 401(k)s and Other ERISA Plans Are Different
Clark v. Rameker was about IRAs. Inherited balances that remain inside an ERISA-covered employer plan, such as a 401(k), 403(b), or pension, are governed by a separate rule. ERISA’s anti-alienation provision, 29 U.S.C. 1056(d), bars assignment of plan benefits to creditors.4Office of the Law Revision Counsel. 29 U.S. Code 1056 – Form and Payment of Benefits The Supreme Court confirmed in Patterson v. Shumate (1992) that ERISA plan assets sit outside the bankruptcy estate entirely.
The catch is what happens next. If a non-spouse beneficiary transfers those funds out of the employer plan into an inherited IRA, the ERISA shield is gone and the Clark rule takes over. Not every plan lets a non-spouse beneficiary keep assets in the plan indefinitely, but where that option exists, staying put can matter for creditor exposure.
State Law Controls Outside Bankruptcy
Clark is a bankruptcy case. When a creditor comes after an inherited IRA outside bankruptcy through a civil judgment or collection action, the beneficiary’s state exemption statutes decide the outcome, and those statutes vary widely.
A minority of states have passed laws that specifically protect inherited IRAs from creditors. Most have not, which leaves the account exposed to levy in the same way an ordinary bank account would be. Because these statutes change over time and turn on specific state language, the only reliable answer is to check your own state’s current exemption law or ask a local attorney.
One rule applies everywhere: state protection only reaches money still sitting inside the inherited IRA. Once you withdraw funds into a personal checking or savings account, the special status is gone.
The 10-Year Rule Forces Money Into the Open
The SECURE Act of 2019 changed how quickly most non-spouse beneficiaries have to empty an inherited IRA. If the original owner died on or after January 1, 2020, most non-spouse beneficiaries must withdraw the entire balance by the end of the tenth year after the owner’s death.3Internal Revenue Service. Retirement Topics – Beneficiary If the owner died on or after their required beginning date, annual required minimum distributions also apply in years one through nine, with the rest due by year ten.
Every distribution taken out of the account lands in a personal account, where any creditor protection tied to the IRA structure disappears. The old stretch-IRA approach, which let beneficiaries keep most of the balance sheltered inside the account for decades, is no longer available for most heirs.
The SECURE Act preserved a longer stretch for five categories of “eligible designated beneficiaries”:3Internal Revenue Service. Retirement Topics – Beneficiary
- The surviving spouse (who also has the rollover option above).
- A minor child of the deceased, until reaching the age of majority.
- A disabled individual, as defined under federal tax law.
- A chronically ill individual, certified by a licensed health care practitioner.
- A beneficiary not more than 10 years younger than the deceased owner.
Beneficiaries in these categories can keep more of the balance inside the account for longer, which extends whatever creditor protection the account structure provides.
Using a Trust to Restore Protection
The standard estate-planning fix for the Clark problem is to name a properly drafted trust, rather than an individual, as the IRA beneficiary. When the owner dies, the funds pass into the trust. Because the beneficiary does not own the account outright, creditors generally cannot reach the trust assets the way they could reach an inherited IRA titled in the beneficiary’s name. A trustee controls when and how much is paid out.
To work with the IRA distribution rules, the trust normally has to qualify as a “see-through” trust under Treasury regulations. That means it is valid under state law, becomes irrevocable at the owner’s death, names identifiable individual beneficiaries, and is documented to the IRA custodian on the required timeline.
There are two common flavors. A conduit trust passes each IRA distribution straight through to the beneficiary, which is simple but drops the money into the beneficiary’s personal accounts where creditors can reach it. An accumulation trust lets the trustee hold distributions inside the trust, which offers stronger creditor protection but can trigger higher trust-level income tax rates on retained income. Since the SECURE Act compressed most beneficiaries into a 10-year payout, accumulation trusts have become more attractive when creditor protection is the priority.
This planning has to happen while the IRA owner is alive. Errors in the trust language can disqualify it as a see-through trust, accelerate the payout timeline, or leave the assets exposed to the very creditors the trust was meant to keep out. An estate planning attorney familiar with both the distribution rules and your state’s creditor laws is the right resource.
Divorce Is a Separate Question
An inherited IRA is usually treated as separate property in divorce because it was received by inheritance rather than earned during the marriage, and separate property is typically not divided. That classification can be lost through commingling, such as depositing inherited funds into a joint account or using them for shared expenses in a way that makes the origin untraceable. State law controls the classification, and community property states and equitable distribution states may analyze it differently. Keeping the inherited IRA in a solely titled account and documenting its inheritance origin is the safest way to preserve its separate character.