One of the most persistent rumors regarding individual retirement accounts (“IRAs”) is that they are exempt from all creditors. While it is true that the laws of most states exempt IRAs from general creditors, including in the event of a bankruptcy, IRAs are generally not exempt from tax levies.
The Internal Revenue Code provides a specific list of property that is exempt from federal tax levy, and IRAs are not included on this list. The statute expressly provides that, other than property listed in the statute, no property is exempt from tax levy. Despite this clear statement, many professionals, including lawyers and bankers, believe that state exemption laws protect IRAs from federal tax levy. However, case law and other official interpretations generally provide that IRAs are not protected, regardless of any state law. In fact, the IRS Manual specifically states that no federal or state law can exempt additional property.
In addition to the federal statute stating that IRAs are not exempt from federal tax levy, many states have similar laws. For example, Missouri statute provides that no property, including IRAs, is exempt from levy to satisfy state, county, or city tax.
Though this is not a new development in the law, because of the persistence of misinformation regarding IRAs, you may want to take this opportunity to review your procedures concerning tax levies. Additionally, you may want to seek legal advice regarding state tax levies in the states in which your bank operates.