|ROUSEY V. JACOWAY (03-1407) 544 U.S. 320 (2005)
347 F.3d 689, reversed and remanded.
[ Thomas ]
RICHARD GERALD ROUSEY, et ux., PETITIONERS
JILL R. JACOWAY
ON WRIT OF CERTIORARI TO THE UNITED STATES
APPEALS FOR THE EIGHTH CIRCUIT
[April 4, 2005]
Justice Thomas delivered the opinion of the Court.
The Bankruptcy Code permits debtors to exempt certain property from the bankruptcy estate, allowing them to retain those assets rather than divide them among their creditors. 11 U.S.C. § 522. The question in this case is whether debtors can exempt assets in their Individual Retirement Accounts (IRAs) from the bankruptcy estate pursuant to §522(d)(10)(E). We hold that IRAs can be so exempted.
Petitioners Richard and Betty Jo Rousey were formerly employed at Northrup Grumman Corp. At the termination of their employment, Northrup Grumman required them to take lump-sum distributions from their employer-sponsored pension plans. In re Rousey, 283 B. R. 265, 268 (Bkrtcy. App. Panel CA8 2002); Brief for Petitioners 2. The Rouseys deposited the lump sums into two IRAs, one in each of their names. 283 B. R., at 268.
The Rouseys accounts qualify as
IRAs under a number of requirements imposed by the Internal
Revenue Code. Each account is a trust created or
organized in the United States for the exclusive benefit of an
individual or his beneficiaries. 26 U.S.C. §
408(a) (2000 ed. and Supp. II). The Internal Revenue Code
limits the types of assets in which IRA-holders may invest
their accounts, §§408(a)(3), (a)(5), and provides
that the balance in IRAs is nonforfeitable, §408(a)(4).
It also caps yearly contributions to IRAs.
§408(o)(2). Withdrawals made before the
accountholder turns 591
IRA contributions receive favorable tax treatment. In particular, the Internal Revenue Code generally defers taxation of the money placed in IRAs and the income earned from those sums until the assets are withdrawn. See §219(a) (contributions to IRAs are tax deductible); §408(e)(1) (IRA is tax exempt). Moreover, within a certain timeframe accountholders can, as the Rouseys did here, roll over distributions received from other retirement plans. §408(a)(1). The Internal Revenue Code encourages such rollovers by making them nontaxable. §§408(d)(3), 402(c)(1), 403(b)(8), and 457(e)(16).
The Rouseys IRA agreements, as
well as relevant regulations, provide that their entire
interest in the custodial account must be, or begin to be,
distributed by April 1 following the calendar yearend in
which they reach age 701
Several years after establishing their IRAs, the Rouseys filed a joint Chapter 7 bankruptcy petition in the United States Bankruptcy Court for the Western District of Arkansas. In the schedules and statements accompanying their petition, the Rouseys sought to shield portions of their IRAs from their creditors by claiming them as exempt from the bankruptcy estate pursuant to 11 U.S.C. § 522(d)(10)(E). This exemption provides that a debtor may withdraw from the bankruptcy estate his right to receive
(E) a payment under a stock bonus, pension, profitsharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor .
The Bankruptcy Court appointed respondent Jill R. Jacoway as the Chapter 7 Trustee. As Trustee, Jacoway is responsible for overseeing the liquidation of the bankruptcy estate and the distribution of the proceeds. She objected to the Rouseys claim for the exemption of their IRAs and moved for turnover of those sums to her. The Bankruptcy Court sustained Jacoways objection and granted her motion. 275 B. R., at 309.
The Rouseys appealed. The Bankruptcy
Appellate Panel (BAP) agreed with the Bankruptcy Court that the
Rouseys could not exempt their IRAs under §522(d)(10)(E).
It concluded that the IRAs were not
The Rouseys again appealed and the
Court of Appeals for the Eighth Circuit affirmed. The Court of
Appeals concluded that, even if the Rouseys IRAs were
As a general matter, upon the filing of a petition for bankruptcy, all legal or equitable interests of the debtor in property become the property of the bankruptcy estate and will be distributed to the debtors creditors. §541(a)(1). To help the debtor obtain a fresh start, the Bankruptcy Code permits him to withdraw from the estate certain interests in property, such as his car or home, up to certain values. See, e.g., §522(d); United States v. Security Industrial Bank, 459 U.S. 70, 72, n. 1 (1982). In this case, the Rouseys claimed their IRAs as exempt under §522(d)(10)(E). Under the terms of the statute, see supra, at 3, the Rouseys right to receive payment under their IRAs must meet three requirements to be exempted under this provision: (1) the right to receive payment must be from a stock bonus, pension, profitsharing, annuity, or similar plan or contract; (2) the right to receive payment must be on account of illness, disability, death, age, or length of service; and (3) even then, the right to receive payment may be exempted only to the extent that it is reasonably necessary to support the accountholder or his dependents. §522(d)(10)(E).
The dispute in this case is whether the Rouseys IRAs fulfill the first and second requirements. This Court implied that IRAs like the Rouseys satisfy both elements in Patterson v. Shumate, 504 U.S. 753 (1992). There, in construing another section of the Bankruptcy Code, this Court stated that IRAs could be exempted pursuant to §522(d)(10)(E). Id., at 762763 (Although a debtors interest [in an IRA] could not be excluded under §541(c)(2) , that interest nevertheless could be exempted under §522(d)(10)(E) (footnote omitted)). We now reaffirm that statement and conclude that IRAs can be exempted from the bankruptcy estate pursuant to §522(d)(10)(E).
We turn first to the requirement that
the payment be on account of illness, disability, death,
age, or length of service. Ibid. We have
interpreted the phrase on account of elsewhere
within the Bankruptcy Code to mean because of,
thereby requiring a causal connection between the term that the
phrase on account of modifies and the factor
specified in the statute at issue. Bank of America Nat.
Trust and Sav. Assn. v. 203 North LaSalle Street
U.S. 434, 450451 (1999). In reaching that
conclusion, we noted that because of was
certainly the usage meant for the phrase at other places
in the [bankruptcy] statute, including the provision at
issue here§522(d)(10)(E). Ibid. This
meaning comports with the common understanding of on
account of. See, e.g., Random House Dictionary of
the English Language 13 (2d ed. 1987) (listing as definitions
by reason of, because of);
Websters Third New International Dictionary 13 (1981)
(hereinafter Websters 3d) (same). The context of this
provision does not suggest that Congress deviated from the
terms ordinary meaning. Thus, on account of
in §522(d)(10)(E) requires that the right to receive
payment be because of
Jacoway argues that the Rouseys right to receive payment from their IRAs is not because of these listed factors. In particular, she asserts that the Rouseys can withdraw funds from their IRAs for any reason at all, so long as they are willing to pay a 10 percent penalty. Thus, Jacoway maintains that there is no causal connection between the Rouseys right to payment and age (or any other factor), because their IRAs provide a right to payment on demand.
We disagree. The statutes governing
IRAs persuade us that the Rouseys right to payment from
IRAs is causally connected to their age. Their right to
receive payment of the entire balance is not in dispute.
Because their accounts qualify as IRAs under 26 U.S.C. §
408(a) (2000 ed. and Supp. II), the Rouseys have a
nonforfeitable right to the balance held in those accounts,
§408(a)(4). That right is restricted by a 10 percent tax
penalty that applies to withdrawals from IRAs made before the
accountholder turns 591
In addition to requiring that the IRAs provide a right to payment on account of age or one of the other factors listed in the statute, 11 U.S.C. § 522(d)(10)(E) also requires the Rouseys IRAs to be stock bonus, pension, profitsharing, annuity, or similar plan[s] or contract[s]. No party contends that the Rouseys IRAs are stock bonus, pension, profitsharing, or annuity plans or contracts. The issue, then, is whether the Rouseys IRAs are similar plan[s] or contract[s] within the meaning of §522(d)(10)(E). To be similar, an IRA must be like, though not identical to, the specific plans or contracts listed in §522(d)(10)(E), and consequently must share characteristics common to the listed plans or contracts. See American Heritage Dictionary of the English Language 1206 (1981) (hereinafter Am. Hert.); Websters 3d 2120.
The Rouseys contend that IRAs are similar to stock bonus, pension, profitsharing, or annuity plans or contracts, in that they have the same primary purpose, namely, enabl[ing] Americans to save for their retirement. Reply Brief for Petitioners 13. Jacoway counters that IRAs are unlike the listed plans because those plans provide deferred compensation, Brief for Respondent 22, whereas IRAs allow complete access to deposited funds and are therefore not deferred at all, id., at 2224. We agree with the Rouseys that IRAs are similar to the plans specified in the statute. Those plans, like the Rouseys IRAs, provide a substitute for wages (by wages, for present purposes, we mean compensation earned as hourly or salary income), and are not mere savings accounts. The Rouseys IRAs are therefore similar plan[s] or contract[s] within the meaning of §522(d)(10)(E).
We turn first to the characteristics the specific plans and contracts listed in §522(d)(10)(E) share. The Bankruptcy Code does not define the terms profitsharing, stock bonus, pension, or annuity. Accordingly, we look to the ordinary meaning of these terms. United States v. LaBonte, 520 U.S. 751, 757 (1997); Perrin v. United States, 444 U.S. 37, 42 (1979). A profitsharing plan, of course, is [a] system by which employees receive a share of the profits of a business enterprise. Am. Hert. 1045.5 Profitsharing plans may provide deferred compensation, but they may also be cash plans in which a predetermined percentage of the profits is distributed to employees at set intervals. J. Langbein & B. Wolk, Pension and Employee Benefit Law 48 (3d ed. 2000). A stock bonus plan is like a profitsharing plan, except that it distributes company stock rather than cash from profits. Id., at 49.6 A pension is defined as a fixed sum paid under given conditions to a person following his retirement from service (as due to age or disability) or to the surviving dependents of a person entitled to such a pension. Websters 3d 1671.7 Finally, an annuity is an amount payable yearly or at other regular intervals for a certain or uncertain period (as for years, for life, or in perpetuity). Id., at 88.8
The common feature of all of these plans is that they provide income that substitutes for wages earned as salary or hourly compensation. This understanding of the plans similarities comports with the other types of payments that a debtor may exempt under §522(d)(10)all of which concern income that substitutes for wages. See, e.g., §522(d)(10)(A) (social security benefit, unemployment compensation, or a local public assistance benefit); §522(d)(10)(B) (a veterans benefit); §522(d)(10)(C) (disability, illness, or unemployment benefit); §522(d)(10)(D) (alimony, support, or separate maintenance). But the plans are dissimilar in other respects: Employers establish and contribute to stock bonus, profitsharing, and pension plans or contracts, whereas an individual can establish and contribute to an annuity on terms and conditions he selects. Moreover, pension plans and annuities provide deferred payment, whereas profitsharing or stock bonus plans may or may not provide deferred payment. And while a pension provides retirement income, none of these other plans necessarily provides retirement income. What all of these plans have in common is that they provide income that substitutes for wages.
Several considerations convince us
that the income the Rouseys will derive from their IRAs is
likewise income that substitutes for wages. First, the minimum
distribution requirements, as discussed above, require
distribution to begin at the latest in the calendar year after
the year in which the accountholder turns 701
We find unpersuasive Jacoways contention that the IRAs cannot be similar plans or contracts because the Rouseys have complete access to them. At bottom, this contention rests, as did her on account of argument, on the premise that the tax penalty imposed for early withdrawal is modest and hence not a true limit on the withdrawal of funds. As explained above, however, that penalty erects a substantial barrier to early withdrawal. Supra, at 67. Funds in a typical savings account, by contrast, can be withdrawn without age-based penalty.
We also reject Jacoways argument that the availability of IRA withdrawals exempt from the 10 percent penalty renders the Rouseys IRAs more like savings accounts. While Jacoway is correct that the Internal Revenue Code permits penalty-free early withdrawals in certain limited circumstances, 26 U.S.C. § 72(t)(2), these exceptions do not reduce the IRAs to savings accounts.
The exceptions are narrow. For example, penalty-free early distributions for health insurance premiums are limited to unemployed individuals who have received unemployment compensation for at least 12 consecutive weeks and have taken those distributions during the same year in which the unemployment compensation is made. §72(t)(2)(D). These payments are further limited to the actual amount paid for insurance for the accountholder, his spouse, and his dependents. §72(t)(2)(D)(iii). The Internal Revenue Code likewise caps the amount of, and sets qualifications for, both the higher education expenses and first-time home purchases for which penalty-free early distributions can be taken. §§72(t)(2)(E), 72(t)(7) (higher education expenses); §§72(t)(2)(F), 72(t)(8) (home purchases). The Internal Revenue Code also permits penalty-free distributions to a beneficiary on the death of the accountholder or in the event that the accountholder becomes disabled. §§72(t)(2)(A)(ii)(iii).9
These exceptions are limited in amount and scope. Even with these carveouts, an early withdrawal without penalty remains the exception, rather than the rule. And as we explained in discussing the on account of requirement, withdrawals from other retirement plans receive similar tax treatment.
Our conclusion that the Rouseys IRAs can be exempt under 11 U.S.C. § 522(d)(10)(E) finds support in clauses (i)(iii) of §522(d)(10)(E). These clauses bring into the estate certain rights to payment that otherwise would be exempt under §522(d)(10)(E). They provide that a right to receive payment cannot be exempt if:
(i) such plan or contract was established by or under the auspices of an insider that employed the debtor at the time the debtors rights under such plan or contract arose;
(ii) such payment is on account of age or length of service; and
(iii) such plan or contract does not qualify under section 401(a), 403(a), 403(b) or 408 of the Internal Revenue Code of 1986.
Thus, clauses (i)(iii) preclude the debtor from using this exemption if an insider established his plan or contract; the right to receive payment is on account of age or length of service; and the plan does not qualify under the specified Internal Revenue Code sections, including the section that governs IRAs, 26 U.S.C. § 408 (2000 ed. and Supp. II).
As a general matter, it makes little sense to exclude from the exemption plans that fail to qualify under §408, unless all plans that do qualify under §408, including IRAs, are generally within the exemption. If IRAs were not within 11 U.S.C. § 522(d)(10)(E), Congress would not have referred to them in its exception. McKown, 203 F.3d, at 1190. More specifically, clause (iii) suggests that plans qualifying under 26 U.S.C. § 408 (2000 ed. and Supp. II), including IRAs are similar plans or contracts. The other sections of the Internal Revenue Code cited in clause (iii)§§401(a), 403(a), and 403(b)all establish requirements for tax-qualified retirement plans that take the form of, among other things, annuities, profitsharing plans, and stock bonus plans. By grouping §408 with these other plans that are of the specific types listed in subparagraph (E), clause (iii) suggests that IRAs are similar to them. Thus, the text of these clauses not only suggests generally that the Rouseys IRAs are exempt, but also supports our conclusion that they are similar plan[s] or contract[s] under 11 U.S.C. § 522(d)(10)(E).
In sum, the Rouseys IRAs fulfill both of §522(d)(10)(E)s requirements at issue herethey confer a right to receive payment on account of age and they are similar plans or contracts to those enumerated in §522(d)(10)(E). The judgment of the Court of Appeals is therefore reversed, and the case is remanded for further proceedings consistent with this opinion.
It is so ordered.
1. See Amromin & Smith, What Explains
Early Withdrawals from Retirement Accounts? Evidence From a
Panel of Taxpayers, 56 National Tax Journal 595, 602 (Sept.
2003) (Table 1) (3.4 percent of IRA holders took penalized
withdrawals in 1996); In re Cilek, 115 B. R. 974,
988, n. 15 (Bkrtcy. Ct. WD Wis. 1990) ([O]f the
$6,457,306,674 deposited in IRAs in the nations credit
unions, only 1.2% was withdrawn early and suffered a tax
penalty during 1987, and only 1.27% was withdrawn during
1988); see also Sabelhaus, Projecting IRA Balances and
Withdrawals, 20 Employee Benefit Research Institute Notes 1, 3
(May 1999) (finding that [t]he pattern in both [1993 and
1996] suggests infrequent withdrawals from IRAs by those
2. We need not and do not reach the question whether penalties of less than 10 percent or of a fixed amount would also be a sufficient barrier to early withdrawal.
3. The Rouseys are entitled to
penalty-free distributions because of factors apart from age in
certain circumstances. See 26 U.S.C. §
72(t)(2)(A)(ii)(iv) (permitting penalty-free
distributions due to the death of or disability of the
IRA-holder, or as substantially equal periodic payments for the
life expectancy of the accountholder); 72(t)(2)(B) (medical
expenses); 72(t)(2)(D)(F) (health insurance premiums,
certain higher education expenses, and first-time home
purchase). But these circumstances are confined to specific
and narrow uses. See infra, at 1213. Thus, that
there are other circumstances in which the Rouseys can receive
payment does not change our conclusion that they have a right
to payment on account of age, for these exceptions do not
undermine the fact that they cannot obtain unrestricted use of
their funds until age 59
4. OGilvie v. United States, 519 U.S. 79 (1996), and Commissioner v. Schleier, 515 U.S. 323 (1995), upon which Jacoway relies, Brief for Respondent 1719, are consistent with our conclusion that petitioners IRAs satisfy the statutes on account of requirement. Those cases involved the meaning of the phrase on account of in a tax provision that permitted the exclusion from income of damages received on account of personal injuries. OGilvie, supra, at 81 (emphasis deleted); Schleier, supra, at 329. In both cases, we rejected the claim that damages that were punitive in nature were on account of personal injuries, since such damages did not compensate for the personal injuries. OGilvie, supra, at 8384; Schleier, supra, at 331332. In so holding in OGilvie, we expressly rejected a but for causation reading of the statute. See 519 U.S., at 8283. We instead concluded, as we have here, that the phrase on account of means by reason of[, or] because of. Id., at 83.
5. See also 12 Oxford English Dictionary 580 (2d ed. 1989) (OED) ([T]he sharing of profits, spec. between employer and employed); Websters 3d 1811 ([A] system or process under which employees receive a part of the profits of an industrial or commercial enterprise).
6. See also id., at 2247 (defining stock bonus as a bonus paid to corporation executives and employees in shares of stock).
7. See also Am. Hert. 970 (sum of money paid regularly as a retirement benefit or by way of patronage).
8. See also id., at 54 ([T]he annual payment of an allowance or income; [t]he interest or dividends paid annually on an investment of money); 1 OED 488 ([a] yearly grant, allowance, or income, or [a]n investment of money, whereby the investor becomes entitled to receive a series of equal annual payments, which, except in the case of perpetual annuities, includes the ultimate return of both principal and interest).
9. The statute also permits penalty-free
early withdrawal in the form of substantially equal periodic
payments made for the life expectancy of the accountholder. 26 U.S.C. §
72(t)(2)(iv). This exception is likewise limited. If
these payments are modified before the accountholder turns