State law allows creditors to claim funds in a debtor’s IRA as long as there is still enough money to support the debtor, his or her spouse and dependents after retirement.

According to the San Francisco Chronicle, when a suit by Los Angeles attorney Don Haycock against Hugh McMullen, another attorney, was ruled to be unfounded and malicious last year, McMullen was awarded $515,000 in damages and sought to collect most of it from Haycock’s $400,000 IRA. It contained money that Haycock had deposited  after retiring as a patent lawyer from Hughes Aircraft in 1987.

Haycock contended that because all of the assets in his IRA can be traced to his fully exempt private retirement plan with Hughes and no assets have been added since, the full exemption continues to apply to those funds.

However, McMullen argued that the full exemption was lost when the exempt plan assets were rolled over into the IRA, because IRAs are given only a limited exemption that protects only “necessary to provide for the support of the judgment debtor and his dependents when the judgment debtor retires, taking into account all resources that are likely to be available at the time of retirement.”

The trial court ruled in 2000 in favor of McMullen and exempted only $100,000 of the IRAs total assets.

The appeals court overturned that decision and disagreed with a previous federal bankruptcy ruling that said the full exemption that applies to private retirement plan funds must be altered to fit the exemption that applies to the new account into which the funds are transferred – the IRA.

According to the opinion, the purpose of the exemption is to “safeguard a source of income for retirees at the expense of creditors,” and that goal is ” best met by applying the tracing statute liberally to allow a debtor to trace funds in a manner that best protects his or her assets .”

The full opinion is  here.