Texas residents can face a civil lawsuit for failing to repay a debt. While state law prohibits creditors from garnishing your wages to collect what is owed, creditors can attempt to garnish your bank account or seize other financial assets. Under the Texas Property Code, certain assets are exempt, including contributions to qualified retirement accounts. If you're being sued by a creditor in Texas, learn how to protect your retirement savings from seizure.
Under Section 42.0021 of the Texas Property Code, contributions to a qualified individual retirement account (IRA) -- including a traditional IRA, Roth IRA, Simple IRA or SEP IRA -- are exempt from creditor claims. You may only claim the exemption for the amount of contributions that are deductible under the federal tax code. For traditional and Roth IRAs established under Section 408 or 408a of the IRS code, the total amount that may be exempted is limited to $1,171,650 as of 2011. The exemption limitation does not apply to contributions made to a Simple or SEP IRA plan.
Texas law also permits you to claim an exemption for distributions of retirement funds provided the funds are rolled over into another retirement account within 60 days. The exemption applies to funds rolled over from a traditional IRA to a Roth IRA or from an employer-sponsored plan, such as a 401k. If you're rolling over an employer-sponsored plan, you can avoid the federal exemption limitation by putting the money into a separate individual retirement account rather than adding it to an existing IRA. If you're receiving regular distributions from an IRA, federal law also prohibits creditors from garnishing these funds from your bank account.
Texas law treats an inherited IRA differently from any other type of IRA. When you inherit, the IRS requires you to either take minimum distributions based on your life expectancy or receive the full distribution over a five-year period. You cannot, however, make any new contributions to an inherited IRA. For this reason, inherited IRAs are treated differently for exemption purposes. In a 2101 case involving Robert and Janice Chilton, the Eastern Division Texas Bankruptcy Court ruled that inherited IRAs are not exempt from creditor claims. This means that creditors can attempt to seize these funds for unpaid debt, even if you file for bankruptcy protection.
If you contribute funds to an IRA to avoid debt collection efforts, your creditor may still be able to access them. For example, if you liquidated nonexempt assets and put the funds in your IRA before filing bankruptcy, your creditors can try to have your petition dismissed on the grounds that you acted fraudulently. Under state and federal law, your IRA is not considered exempt from garnishment if you owe unpaid child support, alimony or back taxes.
- Texas Legislature: Property Code, Section 42.0021, Exemptions for Certain Savings
- Texas Legislature: Civil Practice and Remedies Code, Chapter 34, Execution on Judgments
- Rack and Olanson: IRAs: Are They Protected From Claims of Creditors?
- Lone Star Land Law; Judgments in Texas; David J. Willis; 2010
- Neighborhood Economic Development Advocacy Project: What Is Exempt from Debt Collection?
- American Bankruptcy Institute Journal; Inherited IRAs: Exemption Issues Under the Code; Jeffrey Cymrot and Donald R. Lassman; May 2011
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