On Monday, a unanimous Supreme Court ruled that federal bankruptcy law shields individual retirement accounts from creditors. This decision gives middle-income consumers, for whom an Individual Retirement Account (IRA) is often the most significant retirement asset, the same protection in bankruptcy that higher-paid workers receive for their 401(k) plans and company pensions.

Those company plans, along with Social Security payments, were already exempt from creditors. But the federal bankruptcy code's treatment of IRA's was ambiguous enough to have resulted in uncertainty and conflicting lower-court decisions. In Monday's opinion, which was written by Justice Clarence Thomas, the Supreme Court overturned a 2003 ruling by the United States Court of Appeals for the Eighth Circuit in St. Louis.

This decision was a great victory for an Arkansas couple who were seeking to shield $65,000 in their two IRA's when they filed for bankruptcy in 2001. The couple, Richard and Betty Jo Rousey, had both worked for the Northrop Grumman Corporation, which required them to take lump-sum distributions from the pension plan when they left. They rolled over the proceeds into two IRA's.

A few years later, the Rouseys filed for bankruptcy under Chapter 7 of the bankruptcy code, in which a court-appointed trustee supervises the sale of any assets not exempt under the statute and distributes the proceeds to creditors. The bankruptcy court, an appellate bankruptcy panel, and the Eighth Circuit all agreed with the trustee, Jill R. Jacoway, that the Rouseys' IRA's were not exempt and, therefore, were available to their creditors.

The Supreme Court's decision overturning the Eighth Circuit will have limited importance if the current bankruptcy bill becomes law. This bill, which was passed by the Senate last month and will be taken up later in the week by the House of Representatives, makes federal bankruptcy law less protective of consumers. But it contains a provision that addresses "protection of retirement savings in bankruptcy," including IRA's among the retirement accounts to be shielded from creditors.

Brady C. Williamson, a bankruptcy law specialist, said in an interview that this protection would become all the more important given the strictures placed on consumers by the overall bankruptcy bill being considered by the House. Williamson opposes the bill.

Protecting IRA's, he said, "validates the core premise of bankruptcy law, which is that you get a fresh start, not from scratch, but with the ability to keep some core assets out of the hands of creditors."

The case, Rousey v. Jacoway, No. 03-1407, was argued over four months ago, and neither the argument nor Justice Thomas's opinion referred to the pending legislation.

Instead, the opinion parsed the language of the current bankruptcy code, which exempts "a payment under a stock bonus, pension, profit-sharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service."

That provision required the Supreme Court to answer two questions. First, are payments from an IRA made "on account of age?" Secondly, is an IRA, which is not mentioned in the statute, a plan similar to those that are named specifically (i.e., stock bonus, pension, profit-sharing, annuity)?

The court answered yes to both those questions. Justice Thomas said that the 10 percent tax penalty applying to withdrawals from an IRA before the age of 59½ meant that the intent of Congress is to deter early withdrawals and encourage people to use these accounts as they were intended: for retirement.

The 10 percent is a substantial penalty, he said, and he noted that it did deter all but a small fraction of account holders. Consequently, Justice Thomas concluded, an account holder's unrestricted right to the assets in an IRA depends on age, and the right to payment was "on account" of age.

Answering the second question, the court said an IRA was similar to the pension plans that the statute explicitly exempts because, like those kinds of plans, an IRA has "the same 'primary purpose,' namely Americans to save for their retirement" by providing a substitute for wages earned while working. Justice Thomas noted that there was a severe tax penalty for those who did not begin to withdraw money from an IRA as required during the year after turning 70½. This provision also emphasized using IRA's as retirement accounts, he said.

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