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SUPREME COURT OF THE UNITED STATES
_________________
No. 13–299
_________________
BRANDON C. CLARK et ux., PETITIONERS v.
WILLIAM J. RAMEKER, TRUSTEE, et al.
on writ of certiorari to the united states
court of appeals for the seventh circuit
[June 12, 2014]
Justice Sotomayor
delivered the opinion of the Court.
When an individual
files for bankruptcy, she may exempt particular categories of
assets from the bankruptcy estate. One such category includes
certain “retirement funds.” 11 U. S. C. §522(b)(3)(C).
The question presented is whether funds contained in an inherited
individual retirement account (IRA) qualify as “retirement funds”
within the meaning of this bankruptcy exemption. We hold that they
do not.
I
A
When an individual
debtor files a bankruptcy petition, her “legal or equitable
interests . . . in property” become part of the
bankruptcy estate. §541(a)(1). “To help the debtor obtain a fresh
start,” however, the Bankruptcy Code allows debtors to exempt from
the estate limited interests in certain kinds of property. Rousey
v. Jacoway, 544 U. S. 320, 325 (2005) . The exemption at issue
in this case allows debtors to protect “retirement funds to the
extent those funds are in a fund or account that is exempt from
taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of
the Internal Revenue Code.” §§522(b)(3)(C), (d)(12).[
1] The enumerated sections of the Internal
Revenue Code cover many types of accounts, three of which are
relevant here.
The first two are
traditional and Roth IRAs, which are created by 26
U. S. C. §408 and §408A, respectively. Both types of
accounts offer tax advantages to encourage individuals to save for
retirement. Qualified contributions to traditional IRAs, for
example, are tax-deductible. §219(a). Roth IRAs offer the opposite
benefit: Although contributions are not tax-deductible, qualified
distributions are tax-free. §§408A(c)(1), (d)(1). To ensure that
both types of IRAs are used for retirement purposes and not as
general tax-advantaged savings vehicles, Congress made certain
withdrawals from both types of accounts subject to a 10 percent
penalty if taken before an accountholder reaches the age of 59½.
See §§72(t)(1)–(2); see also n. 4, infra.
The third type of
account relevant here is an inher-ited IRA. An inherited IRA is a
traditional or Roth IRA that has been inherited after its owner’s
death. See §§408(d)(3)(C)(ii), 408A(a). If the heir is the owner’s
spouse, as is often the case, the spouse has a choice: He or she
may “roll over” the IRA funds into his or her own IRA, or he or she
may keep the IRA as an inherited IRA (subject to the rules
discussed below). See Internal Revenue Service, Publication 590:
Individual Retirement Arrangements (IRAs), p. 18 (Jan. 5, 2014).
When anyone other than the owner’s spouse inherits the IRA, he or
she may not roll over the funds; the only option is to hold the IRA
as an inherited account.
Inherited IRAs do not
operate like ordinary IRAs. Unlike with a traditional or Roth IRA,
an individual may withdraw funds from an inherited IRA at any time,
without paying a tax penalty. §72(t)(2)(A)(ii). Indeed, the owner
of an inherited IRA not only may but must withdraw its funds: The
owner must either withdraw the entire balance in the account within
five years of the original owner’s death or take minimum
distributions on an annual basis. See §§408(a)(6), 401(a)(9)(B); 26
CFR §1.408–8 (2013) (Q–1 and A–1(a) incorporating §1.401(a)(9)–3
(Q–1 and A–1(a))); see generally D. Cartano, Taxation of Individual
Retirement Accounts §32.02[A] (2013). And unlike with a traditional
or Roth IRA, the owner of an inherited IRA may never make
contributions to the account. 26 U. S. C. §219(d)(4).
B
In 2000, Ruth Heffron
established a traditional IRA and named her daughter, Heidi
Heffron-Clark, as the sole beneficiary of the account. When Ms.
Heffron died in 2001, her IRA—which was then worth just over
$450,000—passed to her daughter and became an inherited IRA. Ms.
Heffron-Clark elected to take monthly distri-butions from the
account.
In October 2010, Ms.
Heffron-Clark and her husband, petitioners in this Court, filed a
Chapter 7 bankruptcy petition. They identified the inherited IRA,
by then worth roughly $300,000, as exempt from the bankruptcy
estate under 11 U. S. C. §522(b)(3)(C). Respondents, the
bankruptcy trustee and unsecured creditors of the estate, objected
to the claimed exemption on the ground that the funds in the
inherited IRA were not “retirement funds” within the meaning of the
statute.
The Bankruptcy Court
agreed, disallowing the exemption. In re Clark, 450 B. R.
858, 866 (WD Wisc. 2011). Relying on the “plain language of
§522(b)(3)(C),” the court concluded that an inherited IRA “does not
contain anyone’s ‘retirement funds,’ ” because unlike with a
traditional IRA, the funds are not “segregated to meet the needs
of, nor distributed on the occasion of, any person’s retirement.”
Id., at 863.[
2] The District
Court reversed, explaining that the exemption covers any account
containing funds “originally” “accumulated for retirement
purposes.” In re Clark, 466 B. R. 135, 139 (WD Wisc.
2012). The Seventh Circuit reversed the District Court’s judgment.
In re Clark, 714 F. 3d 559 (2013). Pointing to the
“[d]if-ferent rules govern[ing] inherited” and noninherited IRAs,
the court concluded that “inherited IRAs represent an opportunity
for current consumption, not a fund of retirement savings.” Id., at
560, 562.
We granted certiorari
to resolve a conflict between the Seventh Circuit’s ruling and the
Fifth Circuit’s decision in In re Chilton, 674 F. 3d 486
(2012). 571 U. S. ___ (2013). We now affirm.
II
The text and purpose
of the Bankruptcy Code make clear that funds held in inherited IRAs
are not “retirement funds” within the meaning of §522(b)(3)(C)’s
bankruptcy exemption.
A
The Bankruptcy Code
does not define “retirement funds,” so we give the term its
ordinary meaning. See Octane Fitness, LLC v. ICON Health &
Fitness, Inc., 572 U. S. ___, ___ (2014) (slip op., at 7). The
ordinary meaning of “fund[s]” is “sum[s] of money . . .
set aside for a specific purpose.” American Heritage Dictionary 712
(4th ed. 2000). And “retirement” means “[w]ithdrawal from one’s
occupation, business, or office.” Id., at 1489. Section
522(b)(3)(C)’s reference to “retirement funds” is therefore
properly understood to mean sums of money set aside for the day an
individual stops working.
The parties agree that,
in deciding whether a given set of funds falls within this
definition, the inquiry must be an objective one, not one that
“turns on the debtor’s subjective purpose.” Brief for Petitioners
43–44; see also Brief for Respondents 26. In other words, to
determine whether funds in an account qualify as “retirement
funds,” courts should not engage in a case-by-case, fact-intensive
examination into whether the debtor actually planned to use the
funds for retirement purposes as opposed to current consumption.
Instead, we look to the legal characteristics of the account in
which the funds are held, asking whether, as an objective matter,
the account is one set aside for the day when an individual stops
working. Cf. Rousey, 544 U. S., at 332 (holding that
traditional IRAs are included within §522(d)(10)(E)’s exemption for
“a payment under a stock bonus, pension, profitsharing, annuity, or
similar plan or contract on account of . . . age” based
on the legal characteristics of traditional IRAs).
Three legal
characteristics of inherited IRAs lead us to conclude that funds
held in such accounts are not objectively set aside for the purpose
of retirement. First, the holder of an inherited IRA may never
invest additional money in the account. 26 U. S. C.
§219(d)(4). Inherited IRAs are thus unlike traditional and Roth
IRAs, both of which are quintessential “retirement funds.” For
where inherited IRAs categorically prohibit contributions, the
entire purpose of traditional and Roth IRAs is to provide tax
incentives for accountholders to contribute regularly and over time
to their retirement savings.
Second, holders of
inherited IRAs are required to withdraw money from such accounts,
no matter how many years they may be from retirement. Under the Tax
Code, the beneficiary of an inherited IRA must either withdraw all
of the funds in the IRA within five years after the year of the
owner’s death or take minimum annual distributions every year. See
§408(a)(6); §401(a)(9)(B); 26 CFR §1.408–8 (Q–1 and A–1(a)
incorporating §1.401(a)(9)–3 (Q–1 and A–1(a))). Here, for example,
petitioners elected to take yearly distributions from the inherited
IRA; as a result, the account decreased in value from roughly
$450,000 to less than $300,000 within 10 years. That the tax rules
governing inherited IRAs routinely lead to their diminution over
time, regardless of their holders’ proxim-ity to retirement, is
hardly a feature one would expect of an account set aside for
retirement.
Finally, the holder of
an inherited IRA may withdraw the entire balance of the account at
any time—and for any purpose—without penalty. Whereas a withdrawal
from a traditional or Roth IRA prior to the age of 59½ triggers a
10 percent tax penalty subject to narrow exceptions, see n. 4,
infra—a rule that encourages individuals to leave such funds
untouched until retirement age—there is no similar limit on the
holder of an inherited IRA. Funds held in inherited IRAs
accordingly constitute “a pot of money that can be freely used for
current consumption,” 714 F. 3d., at 561, not funds
objectively set aside for one’s retirement.
B
Our reading of the
text is consistent with the purpose of the Bankruptcy Code’s
exemption provisions. As a general matter, those provisions
effectuate a careful balance between the interests of creditors and
debtors. On the one hand, we have noted that “every asset the Code
permits a debtor to withdraw from the estate is an asset that is
not available to . . . creditors.” Schwab v. Reilly, 560
U. S. 770, 791 (2010) . On the other hand, exemptions servethe
important purpose of “protect[ing] the debtor’s essential needs.”
United States v. Security Industrial Bank, 459 U. S. 70, 83
(1982) (Blackmun, J., concurring injudgment).[
3]
Allowing debtors to
protect funds held in traditional and Roth IRAs comports with this
purpose by helping to ensure that debtors will be able to meet
their basic needs during their retirement years. At the same time,
the legal limitations on traditional and Roth IRAs ensure that
debtors who hold such accounts (but who have not yet reached
retirement age) do not enjoy a cash windfall by virtue of the
exemption—such debtors are instead required to wait until age 59½
before they may withdraw the funds penalty-free.
The same cannot be said
of an inherited IRA. For if an individual is allowed to exempt an
inherited IRA from her bankruptcy estate, nothing about the
inherited IRA’s legal characteristics would prevent (or even
discourage) the individual from using the entire balance of the
account on a vacation home or sports car immediately after her
bankruptcy proceedings are complete. Allowing that kind of
exemption would convert the Bankruptcy Code’s purposes of
preserving debtors’ ability to meet their basic needs and ensuring
that they have a “fresh start,” Rousey, 544 U. S., at 325,
into a “free pass,” Schwab, 560 U. S., at 791. We decline to
read the retirement funds provision in that manner.
III
Although petitioners’
counterarguments are not without force, they do not overcome the
statute’s text and purpose.
Petitioners’ primary
argument is that funds in an inherited IRA are retirement funds
because—regardless of whether they currently sit in an account
bearing the legal characteristics of a fund set aside for
retirement—they did so at an earlier moment in time. After all,
petitioners point out, “the initial owner” of the account “set
aside the funds in question for retirement by depositing them in a”
traditional or Roth IRA. Brief for Petitioners 21. And “[t]he
[initial] owner’s death does not in any way affect the funds in the
account.” Ibid.
We disagree. In
ordinary usage, to speak of a person’s “retirement funds” implies
that the funds are currently in an account set aside for
retirement, not that they were set aside for that purpose at some
prior date by an entirely different person. Under petitioners’
contrary logic, if an individual withdraws money from a traditional
IRA and gives it to a friend who then deposits it into a checking
account, that money should be forever deemed “retirement funds”
because it was originally set aside for retirement. That is plainly
incorrect.
More fundamentally, the
backward-looking inquiry urged by petitioners would render a
substantial portion of 11 U. S. C. §522(b)(3)(C)’s text
superfluous. The funds contained in every individual-held account
exempt from taxation under the Tax Code provisions enumerated in
§522(b)(3)(C) have been, at some point in time, “retirement funds.”
So on petitioners’ view, rather than defining the exemption to
cover “retirement funds to the extent that those funds are in a
fund or account that is exempt from taxation under [the enumerated
sections] of the Internal Revenue Code,” Congress could have
achieved the exact same result through a provision covering any
“fund or account that is exempt from taxation under [the enumerated
sections].” In other words, §522(b)(3)(C) requires that funds
satisfy not one but two conditions in order to be exempt: the funds
must be “retirement funds,” and they must be held in a covered
account. Petitioners’ reading would write out of the statute the
first element. It therefore flouts the rule that “ ‘a statute
should be construed so that effect is given to all its provisions,
so that no part will be inoperative or superfluous.’ ” Corley
v. United States, 556 U. S. 303, 314 (2009) .
Petitioners respond
that many of §522’s other exemptions refer to the “debtor’s
interest” in various kinds of property. See, e.g., §522(d)(2)
(exempting “[t]he debtor’s interest, not to exceed [$3,675] in
value, in one motor vehicle”). Section 522(b)(3)(C)’s retirement
funds exemption, by contrast, includes no such reference. As a
result, petitioners surmise, Congress must have meant the provision
to cover funds that were at one time retirement accounts, even if
they were for someone else’s retirement. Brief for Petitioners
33–34. But Congress used the phrase “debtor’s interest” in the
other exemptions in a different manner—not to distinguish between a
debtor’s assets and the assets of another person but to set a limit
on the value of the particular asset that a debtor may exempt. For
example, the statute allows a debtor to protect “[t]he debtor’s
aggregate interest, not to exceed [$1,550] in value, in jewelry.”
§522(d)(4). The phrase “[t]he debtor’s aggregate interest” in this
provision is just a means of introducing the $1,550 limit; it is
not a means of preventing debtors from exempting other persons’
jewelry from their own bankruptcy proceedings (an interpretation
that would serve little apparent purpose). And Congress had noneed
to use the same “debtor’s interest” formulation in §522(b)(3)(C)
for the simple reason that it imposed a value limitation on the
amount of exemptible retirement funds in a separate provision,
§522(n).
Petitioners next
contend that even if their interpretation of “ ‘retirement
funds’ does not independently exclude anything from the scope of
the statute,” that poses no problem because Congress actually
intended that result. Reply Brief 5–6. In particular, petitioners
suggest that when a sentence is structured as §522(b)(3)(C)
is—starting with a broad category (“retirement funds”), then
winnowing it down through limiting language (“to the extent that”
the funds are held in a particular type of account)—it is often the
case that the broad category does no independent limiting work. As
counsel for petitioners noted at oral argument, if a tax were to
apply to “sports teams to the extent that they are members of the
major professional sports leagues,” the phrase “sports teams” would
not provide any additional limitation on the covered entities. Tr.
of Oral Arg. 15.
There are two problems
with this argument. First, while it is possible to conceive of
sentences that use §522(b)(3)(C)’s “to the extent that”
construction in a manner where the initial broad category serves no
exclusionary purpose, that is not the only way in which the phrase
may be used. For example, a tax break that applies to “nonprofit
organizations to the extent that they are medical or scientific”
would not apply to a for-profit pharmaceutical company because the
initial broad category (“nonprofit organizations”) provides its own
limitation. Just so here; in order to qualify for bankruptcy
protection under §522(b)(3)(C), funds must be both “retirement
funds” and in an account exempt from taxation under one of the
enumerated Tax Code sections.
Second, to accept
petitioners’ argument would reintroduce the surplusage problem
already discussed. Supra, at 8–9. And although petitioners are
correct that “the only effect of respondents’ interpretation of
‘retirement funds’ would seemingly be to deny bankruptcy exemption
to inherited IRAs,” Reply Brief 2, as between one interpretation
that would render statutory text superfluous and another that would
render it meaningful yet limited, we think the latter more faithful
to the statute Congress wrote.
Finally, petitioners
argue that even under the inquiry we have described, funds in
inherited IRAs should still qualify as “retirement funds” because
the holder of such an account can leave much of its value intact
until her retirement if she invests wisely and chooses to take only
the minimum annual distributions required by law. See Brief for
Petitioners 27–28. But the possibility that some investors may use
their inherited IRAs for retirement purposes does not mean that
inherited IRAs bear the defining legal characteristics of
retirement funds. Were it any other way, money in an ordinary
checking account (or, for that matter, an envelope of $20 bills)
would also amount to “retirement funds” because it is possible for
an owner to use those funds for retirement.[
4]
* * *
For the foregoing
reasons, the judgment of the United States Court of Appeals for the
Seventh Circuit isaffirmed.
It is so ordered.
