When Richard and Betty Jo Rousey stopped working at Northrup Grumman Corp., Northrup Grumman required them to take lump-sum distributions from their employer-sponsored pension plans. The Rouseys deposited the lump sums into two IRAs, one in each of their names. Several years after creating the IRAs, the Rouseys filed a joint Chapter 7 bankruptcy petition and listed their IRAs as exempt. The trustee objected to the claim that the IRAs were exempt, and the bankruptcy court agreed with the trustee. On appeal, the Bankruptcy Appellate Panel (BAP) agreed that IRAs were not exempt. Appellate courts across the country disagreed on the issue, so the Supreme Court granted certiorari.
JUSTICE THOMAS The question in this case is whether debtors can exempt assets in their Individual Retirement Accounts (IRAs) from the bankruptcy estate pursuant to Section 522(d)(10)(E). This exemption provides that a debtor may withdraw from the bankruptcy estate his “right to receive—(E) a payment under a stock bonus, pension, profitsharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor….”
Under the terms of the statute, the Rouseys’ right to receive payment under their IRAs must meet two requirements to be exempted under this provision: (1) the right to receive payment must be from “a stock bonus, pension, profitsharing, annuity, or similar plan or contract” and (2) the right to receive payment must be “on account of illness, disability, death, age, or length of service.”
We turn first to the requirement that the payment be “on account of illness, disability, death, age, or length of service.” “[O]n account of” in §522(d)(10)(E) requires that the right to receive payment be “because of” illness, disability, death, age, or length of service.
[Trustee] argues that the Rouseys’ right to receive payment from their IRAs is not “because of” these listed factors. In particular, she asserts that the Rouseys can withdraw funds from their IRAs for any reason at all, so long as they are willing to pay a 10 percent penalty. Thus, [Trustee] maintains that there is no causal connection between the Rouseys’ right to payment and age (or any other factor), because their IRAs provide a right to payment on demand.
We disagree. The statutes governing IRAs persuade us that the Rouseys’ right to payment from IRAs is causally connected to their age. The Rouseys have a nonforfeitable right to the balance held in those accounts. That right is restricted by a 10 percent tax penalty that applies to withdrawals from IRAs made before the accountholder turns 59. Contrary to [trustee]’s contention, this tax penalty is substantial. It therefore limits the Rouseys’ right to “payment” of the balance of their IRAs. And because this condition is removed when the accountholder turns age 59, the Rouseys’ right to the balance of their IRAs is a right to payment “on account of” age. Accordingly, we conclude that the Rouseys’ IRAs provide a right to payment on account of age.
In addition to requiring that the IRAs provide a right to payment “on account of” age …, 11 U.S.C. §522(d)(10)(E) also requires the Rouseys’ IRAs to be “stock bonus, pension, profitsharing, annuity, or similar plan[s] or contract[s].” The issue is whether the Rouseys’ IRAs are “similar plan[s] or contract[s]” within the meaning of §522(d)(10)(E). To be “similar,” an IRA must be like, though not identical to, the specific plans or contracts listed in §522(d)(10)(E), and consequently must share characteristics common to the listed plans or contracts.
The common feature of all of these plans is that they provide income that substitutes for wages earned as salary or hourly compensation. This understanding of the plans’ similarities comports with the other types of payments that a debtor may exempt under §522(d)(10)—all of which concern income that substitutes for wages.
Several considerations convince us that the income the Rouseys will derive from their IRAs is likewise income that substitutes for wages. First, the minimum distribution requirements require distribution to begin at the latest in the calendar year after the year in which the accountholder turns 70. Thus, accountholders must begin to withdraw funds when they are likely to be retired and lack wage income. Second, the Internal Revenue Code defers taxation of money held in accounts qualifying as IRAs until the year in which it is distributed, treating it as income only in such years. This tax treatment further encourages accountholders to wait until retirement to withdraw the funds: The later withdrawal occurs, the longer the taxes on the amounts are deferred. Third, absent the applicability of other exceptions discussed above, withdrawals before age 59 are subject to a tax penalty, restricting preretirement access to the funds. Finally, to ensure that the beneficiary uses the IRA in his retirement years, an accountholder’s failure to take the requisite minimum distributions results in a 50-percent tax penalty on funds improperly remaining in the account. All of these features show that IRA income substitutes for wages lost upon retirement and distinguish IRAs from typical savings accounts.
In sum, the Rouseys’ IRAs fulfill both of §522(d)(10)(E)’s requirements at issue here—they confer a right to receive payment on account of age and they are similar plans or contracts to those enumerated in §522(d)(10)(E).
REVERSED and REMANDED.
CRITICAL THINKING:
Return to the considerations enumerated in the next to last paragraph of this case. Justice Thomas determined that these considerations all move toward the conclusion that the income the Rouseys will derive from their IRAs is income that substitutes for wages. What alternative interpretations of those considerations would lead us to believe that the considerations do not lead to that conclusion?
ETHICAL DECISION MAKING:
We can certainly understand the interests advanced by the decision made by the Court in this case. But what stakeholders are potentially harmed by this decision?