Yes, we believe that you may exercise a valid right of setoff of funds in a customer’s checking account, even if some of those funds are a deposit of a retirement account distribution.
Under Illinois law, funds in IRA accounts typically are considered “special deposits” that are exempt from offset rights — the account creates a trust relationship that is protected against creditors. However, your bank is offsetting a checking account, not a retirement plan account.
In addition, while retirement plan distributions are statutorily exempt from judgment creditors, a bank that exercises a valid right of setoff is not a judgment creditor — the bank does not need to obtain a court judgment to exercise its setoff rights. Consequently, in our view, your bank may exercise its contractually created setoff right in your customer’s checking account, including any funds deposited from an IRA distribution check.
For resources related to our guidance, please see:
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Masi v. Ford City Bank and Tr. Co., 779 F.2d 397, 399 (7th Cir. 1985) (“The district court held that under Illinois law an IRA is a ‘special deposit’ created by an express agreement or other circumstances that impliedly create a trust between the depositor and the Bank. Instead of creating the relationship of debtor and creditor, depositing money in an IRA in the state of Illinois creates a bailment. This relationship is protected in Illinois and cannot be reached in satisfaction of a depositor's general indebtedness.”)
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John Hancock Life Ins. Co. v. Cooley, 01-CV-4105-JPG, 2001 WL 1803667, at *2 (S.D. Ill. Oct. 30, 2001) (“Under Illinois law, a retirement plan in the form of an individual retirement account or an individual retirement annuity, is treated as a trust created or organized for the exclusive benefit of an individual or his or her beneficiaries. See 735 ILCS 5/12–1006 . . . .”)
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Illinois Code of Civil Procedure, Exemption for Retirement Plans 735 ILCS 5/12-1006(c) (“A retirement plan that is (i) intended in good faith to qualify as a retirement plan under the applicable provisions of the Internal Revenue Code of 1986, as now or hereafter amended, or (ii) a public employee pension plan created under the Illinois Pension Code, as now or hereafter amended, is conclusively presumed to be a spendthrift trust under the law of Illinois.”)
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Illinois Code of Civil Procedure, Exemption for Retirement Plans 735 ILCS 5/12-1006 (“A debtor's interest in or right, whether vested or not, to the assets held in or to receive pensions, annuities, benefits, distributions, refunds of contributions, or other payments under a retirement plan is exempt from judgment, attachment, execution, distress for rent, and seizure for the satisfaction of debts if the plan (i) is intended in good faith to qualify as a retirement plan under applicable provisions of the Internal Revenue Code of 1986, as now or hereafter amended, or (ii) is a public employee pension plan created under the Illinois Pension Code, as now or hereafter amended.”)