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Are inherited IRAs protected in bankruptcy?

One of the many benefits of bankruptcy is that individual retirement accounts, better known as IRAs, are protected up to roughly $1.2 million. That means any assets held in IRAs up to that amount would not have to be liquidated in the event of a Chapter 7 bankruptcy.

This exemption was put into law more than a decade ago, when the bankruptcy reforms known as the Bankruptcy Abuse Prevention and Consumer Protection Act came into force. Originally, the cap was an even $1 million, but it has since increased by 20 percent.

However, not all IRAs are treated the same way under this law. For people who inherit IRAs from a deceased parent or other relative -- essentially, anyone except for a spouse -- the funds are not generally treated as retirement accounts.

This is because, the Supreme Court of the United States ruled, that money can be withdrawn at any time without penalty, no new money can be added to the account, and beneficiaries are require to withdraw money from the account, regardless of their age.

This could have a big impact on the decision to file for bankruptcy. If, for example, you inherit an IRA worth $100,000 but your debts are more than that, you might have to forfeit all of that money to creditors.

But -- and this is a big "but" for Florida residents -- individual states can decide to exempt inherited IRAs in bankruptcy. Florida is one of the states that have chosen to do so.

Bankruptcy rules and regulations can be tough to keep straight. An experienced Florida bankruptcy attorney can help guide the way for people who need advice.

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