Finish that Rollover before Declaring Bankruptcy

In the recent case of In Re Jones, 123 AFTR 2d 2019-_________ (Bktcy. Ct. IL), an individual taxpayer and petitioner for bankruptcy relief under chapter 7 was able to withdraw $50,000 from his individual retirement account (“IRA”), deposit the funds into his personal account, spend $30,000 of the funds on personal items (primarily lottery tickets), and then subsequently redeposit $20,000 into a TD Ameritrade IRA in the name of the debtor within 60 days of the withdrawal while maintaining the exempt nature of those assets.

Recently, we posted an article about the Lerbakken case involving creditor treatment of certain retirement accounts (also discussed in the bankruptcy context).1. In Lerbakken, the Eighth Circuit opened the door for creditors to access retirement funds held in an account subject to a qualified domestic relations order (“QDRO”). Seemingly, expanding the unanimous Clark case from the U.S. Supreme Court, which stated that inherited IRAs are not an exempt asset under the federal bankruptcy exemption, Lerbakken applies similar logic to retirement accounts received pursuant to a QDRO following a divorce. The case at hand discusses the intersection of limitations of creditors’ rights in bankruptcy (exemption of certain assets of a debtor from creditors’ claims) and the rollover of qualified plans under IRC §408(d)(3) subject to that exemption.

In a rollover contribution, a taxpayer is allowed to, in certain circumstances, withdraw funds from an IRA account and maintain deferral of taxation on those funds so long as that taxpayer recontributes to a new IRA within 60 days of the withdrawal.

In the bankruptcy and creditors’ rights context, an exemption from creditors’ claims generally exists for IRAs (as well as other types of retirement accounts). Because of the nature of a rollover, a debtor will hold cash for that 60-day rollover window. Unsurprisingly, a battle emerges with respect to whether a creditor would or should have access to those rollover funds. As discussed in Jones, timing can be critical, and the interpretation of the Internal Revenue Code can be key.

The Jones Case

In Jones, the debtor withdrew funds from the IRA, spent a large portion of the withdrawn funds on lottery tickets, and subsequently redeposited 40% of those funds within the 60-day rollover window. The bankruptcy trustee contested that this 40% reinvested portion qualified for an exemption from creditors’ claims in bankruptcy, citing primarily three cases: In re Weinhoeft; In re Pink; and In re Gordon.

Burden of Proof

The trustee has the burden of proving that an exemption allowing assets to be free from creditors’ claims in bankruptcy is improperly claimed.2 Thus, the heart of the case at hand centers around overcoming the burden of proof showing that the $20,000 redeposited into the debtor’s IRA prior to the bankruptcy petition should not be an exempt asset, which the trustee ultimately failed to do.

The Trustee’s Arguments

Exemption No Longer Applies Once Removed From Account
In Re Weinhoeft – No Substitutes Apply3

In Weinhoeft, debtors claimed an exemption to creditors’ claims with respect to a portion of settlement proceeds received with respect to a wrongful discharge action because, as the debtors argued, such funds represented the value of pension contributions, an exempt asset, which Mr. Weinhoeft’s employer would have made had his employment continued. The Court noted that the applicable statute protected rights “to assets held in” pension plans and rights to “receive pensions under a retirement plan” applying a very literal reading to the statute. Of note however is that these funds were not actually in a pension plan nor would any distributions from the accounts holding the funds come from the plan.4 The debtors in this case presented arguments analogous to an origin of claim type theory that the Court did not buy.

In Jones, the trustee first argued that the reasoning from Weinhoeft should apply. Particularly, the trustee cites to the Seventh Circuit statement “as soon as funds are withdrawn from a [retirement] plan, creditors can reach them freely.” The Court points out that the trustee neither explains the context of the statement, nor does the trustee explain the application of the Weinhoeft case’s entirely different set of facts to the case at issue. The Court in Jones refused to selectively apply a limited selection from the Weinhoeft case and instead noted that upon the bankruptcy filing, the funds were in an IRA account whereas the funds discussed in Weinhoeft were not.

In re Pink – Tracing Irrelevant, Where are the Funds at Filing?5

Echoing Weinhoeft, the court in Pink illustrated that “it is the destination of the funds that matters.” From my interpretation of the above and the Jones case, it is of key importance that this destination is reached prior to filing a petition for bankruptcy relief. In Pink, debtors withdrew IRA funds and deposited them into a personal bank account held by their attorney prior to filing bankruptcy. The funds were held in that same personal account at the time of the filing of the petition.

Pink‘s application is congruent with Weinhoeft. Taken together, a debtor cannot claim (at least under Illinois law) an exemption from claims of creditors for (1) a substitute for what represents what would otherwise be a retirement account, or (2) funds from a retirement account or pension held in a personal account at the time of the bankruptcy. The Court distinguishes Pink by stating that the funds in Jones were actually in a retirement account at the time of the petition.

In re Gordon – Where is the Money at Filing?6

In Gordon a debtor withdrew $10,000 from an IRA prior to filing for bankruptcy. The funds were deposited again, in a personal bank account, and subsequently used for personal living expenses. Following the withdrawal and without rolling over the remaining funds, the debtor then filed for chapter 7 bankruptcy relief. He claimed an exemption from creditors’ claims on the remaining $5,000 balance of the withdrawn IRA funds currently held in his account. The trustee objected and the Court agreed stating “because the Debtor failed to preserve the exempt character of the funds by rolling them over to another qualified plan, he cannot claim an exemption under § 12-1006.”

The Court in Jones contrasted the facts from Gordon to the case at hand closing with “$20,000 was in the Debtor’s IRA on the date that he filed his bankruptcy case, thus distinguishing this case from those cited by the Trustee.”

Commingling of Funds, Fungibility of Cash

Additionally, the trustee asserted arguments relating to the fungibility of the funds causing an impossibility to determine whether the funds on which the exemption is claimed are indeed the retirement funds entitled to the special protections. The Court, rejecting this argument, stated that in order to be exempt the debtor needed to show the $20,000 at issue originated from the IRA. The Court pointed out that certain distributions and repayments are known as “rollover contributions” and that partial rollover contributions are also permitted as well.7

Partial Use, Complete Taint? No.

Citing a Tax Court Memorandum decision, the Court determined that from the source of the funds does not matter for the purpose of determining whether a rollover contribution occurred.8 In sum, the trustee’s argument was that when an account holder withdraws funds from an IRA and personally benefits from those funds during the rollover period, the entire account loses its qualified status.

An item of note here that was cited in the Zaklama case was the reference to Treas. Reg. §1.408-4(b) stating that, with respect to the 60-day rollover rule, the money distributed from the IRA account be paid back “from the same amount of money and any other property.” Seemingly, the trustee missed this entire reference.

The Unanswered – Conversion of Non-Exempt to Exempt

As a last matter, the Court noted that the trustee made no argument that the debtor converted non-exempt property to exempt property. While I am unconvinced this argument would succeed because taking cash out of an IRA and then placing that amount (or less) back into an account in a rollover within the proscribed 60-day period is really a continuation and rollover an IRA, the Court specifically mentioned that there were no allegations of conversion here because a rollover would, in my opinion (for what that is worth), does not seem to be intended to convert non-exempt to exempt but merely a process of going from exempt to exempt in a manner which has been respected by the bankruptcy courts. It did seem the Court was dropping some hints.


While binding in the Southern District of Illinois, Jones can be enlightening and helpful for bankruptcy, divorce, tax and any other planners that work with retirement accounts. The Court ruled that because the funds were rolled over as permitted by the Internal Revenue Code and thus met the statutory definition as a tax-qualified retirement plan pursuant to applicable state law, the trustee did not meet the burden to prove the exemption from creditors’ claims did not apply. The moral of the Jones case is an easy one, “Be sure to deposit any rollover funds (up to the amount of the withdrawal, no matter the source of funds) if within the 60-day window prior to filing the bankruptcy petition.”


  1. See  S. Gray Edmondson, J.D., LL.M., You Didn’t Earn That! Creditors Allowed Access to Retirement Account of Divorced Spouse (Nov. 5, 2018)
  2. See Bankruptcy Rule 4002(c)
  3. In Re Weinhoeft, 275 F.3d 604 (7th Cir. 2001).
  4. See 11 U.S.C. § 522; 735 ILCS 5/12-1006.
  5. In re Pink, 109 AFTR 2d 2012-2115 (N.D.Ill. May 10, 2012)
  6. In re Gordon, 1996 WL 33401390 (Bankr.C.D.Ill. July 18, 1996).
  7. See IRC §408(d)(3)(A) defining a rollover contribution and IRC §408(d)(3)(D) regarding partial rollover contributions.
  8. See In re Zaklama, T.C. Memo, 2012-346 (2012).


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