Texas Retirement Account and IRA Protection

An ordinary judgment creditor cannot reach a Texan’s retirement account. Texas exempts every plan and account that holds tax-favored retirement, health or education savings, from a 401(k) to a 529 plan, and it puts no dollar limit on the exemption. Inherited IRAs and inherited Roth IRAs are covered by name.

The protection has three limits. Money paid out of a plan stays exempt for 60 days unless it is rolled into another plan. An account that breaks the tax code’s rules stops being exempt at all. And in bankruptcy an inherited IRA survives only when the debtor chooses the Texas exemption list over the federal one.

Which Retirement Accounts Texas Exempts

Texas law exempts every common retirement account from attachment, execution and seizure, and the exemption has no cap. The whole exemption turns on one defined term. A qualified savings plan is “any stock bonus, pension, annuity, deferred compensation, profit-sharing, health, education, or similar plan or account” that federal income tax either exempts or defers until the money is paid out (Tex. Prop. Code § 42.0021(a)). The definition then lists twelve kinds of plan:

• retirement plans sponsored by a private employer, a government or a church;
• plans for the self-employed, and simplified employee pensions;
• IRAs and Roth IRAs, including inherited ones;
• health savings accounts and Coverdell accounts;
• Texas prepaid-tuition and savings-trust accounts, any state’s 529 plan and any state’s ABLE program;
• an annuity or similar contract bought with money taken out of one of these plans.

The exemption adds to the personal-property exemption, so a retirement balance never eats into the capped allowance for household goods, vehicles and other personal property. It covers a person’s interest in the plan whether vested or not. Two things fall outside it. Contributions above the tax code’s limit, and the earnings on them, are not exempt. Neither is an employer’s unfunded, unsecured promise to pay deferred compensation. A loan from the plan is different. The account can be pledged as security for that loan, and that security interest can be enforced against the account.

The statute sets no limit on how many accounts one person may exempt. In Matter of Volpe, 943 F.2d 1451, 1453–54 (5th Cir. 1991), the Fifth Circuit allowed one debtor seven IRAs and a profit-sharing plan, all exempt, because Texas courts read exemption statutes liberally and the section says nothing about how many.

An employer plan governed by ERISA is protected twice over. Federal law makes every pension plan carry a clause against assigning benefits, and the Supreme Court held in Patterson v. Shumate that the clause keeps a participant’s interest out of a bankruptcy estate. The Texas statute reaches the same plans. In Volpe and its companion case, Heitkamp v. Dyke, 943 F.2d 1435 (5th Cir. 1991), the Fifth Circuit held that ERISA does not preempt the Texas exemption. A Texan’s 401(k) is therefore protected by federal law everywhere and by Texas law at home.

Are Inherited IRAs Protected from Creditors in Texas?

Yes, the Texas statute names inherited IRAs and inherited Roth IRAs, and outside bankruptcy a judgment creditor of the beneficiary gets nothing from either. Texas is one of eleven states whose exemption statute names inherited accounts. The statute also covers any plan interest that passes at death, whether to an heir, a survivor or a named beneficiary. That interest is exempt to the same extent it was exempt to the person who died.

The federal rule runs the other way, and the Supreme Court settled it in 2014. In Clark v. Rameker, 573 U.S. 122, it held that an inherited IRA does not hold “retirement funds” within the Bankruptcy Code’s exemption for retirement accounts, 11 U.S.C. § 522(b)(3)(C). The heir cannot add to the account, must draw it down whatever his age, and can empty it at any time without penalty. A Texas debtor who claims the federal exemptions therefore cannot exempt an inherited IRA.

Two years earlier the Fifth Circuit had held the opposite in Chilton v. Moser, 674 F.3d 486 (5th Cir. 2012). The Supreme Court took Clark to resolve that conflict and disagreed with the Fifth Circuit, so Chilton no longer states federal law.

A Texas debtor gets to choose. Federal law offers every debtor its own exemption list unless the debtor’s state has opted out. Texas has not, so a Texas debtor elects either the federal list or the Texas list, never a mix. The election decides the inherited IRA. Under the federal list it is lost to Clark. Under the Texas list it is exempt, because the Texas statute names it and Clark construed only the federal provision.

That is what the bankruptcy court held in In re Kara, 573 B.R. 696 (Bankr. W.D. Tex. 2017). The debtor had first claimed the inherited account under the federal list, and that claim was denied. The debtor then elected the Texas exemptions and claimed the account again, and this time the court allowed it.

The court wrote, at 700–02, that Clark “did not address state law preemption,” and it adopted an Arizona bankruptcy court’s conclusion that the federal retirement exemption is “the floor for exemptions for retirement funds, not the ceiling.” Among the Texas asset protection case law on retirement accounts, Kara is the decision the inherited-IRA rule rests on.

In 2023 a federal district court reached the same result in Lowe v. Jones, No. 1:22-CV-862-RP (W.D. Tex. July 13, 2023). The trustee from Kara appealed a bankruptcy court’s application of that decision and lost again. The district judge held that the Clark trustee had appealed only the ruling on the federal exemption, so reading Clark to preempt state law “overstates the scope of the ruling.” No appeal was taken.

Neither the Fifth Circuit nor the Supreme Court of Texas has decided whether a state’s inherited-IRA exemption survives a Clark objection. Kara is a bankruptcy court’s decision and the 2023 affirmance is a district court’s. Every court to reach the Texas question has answered yes, but none above a district court has been asked.

An older decision denied the exemption and no longer governs. A bankruptcy court held in In re Jarboe, 365 B.R. 717 (Bankr. S.D. Tex. 2007), that a non-spouse beneficiary’s inherited IRA was outside the Texas statute, which at that time did not mention inherited accounts. The Legislature then wrote both kinds of inherited account into the section, and Kara notes, at 702, that Jarboe “relied on the 2006 version.” One rule from Jarboe survives. Proof that an account is an IRA carries the exemption unless the objector shows that the account does not qualify.

A surviving spouse can avoid the question. A spouse who rolls the inherited account into his or her own IRA holds an ordinary IRA from that point, and Clark has nothing to say about it.

Federal law also caps an IRA exemption in bankruptcy, though money that came from an employer plan does not count toward the cap. The Texas statute sets no dollar limit of its own.

How a Texas IRA Loses Its Exemption

A Texas IRA loses its exemption when the account stops qualifying under the Internal Revenue Code, and a prohibited transaction by the owner does exactly that. The exemption reaches a plan or account only while its tax-exempt or tax-deferred status lasts, and once that status is gone a creditor can reach the account.

In Nu-Way Energy Corp. v. Delp, 205 S.W.3d 667 (Tex. App.-Waco 2006, pet. denied), the debtor spent $250,000 of IRA money on a secured claim, and buying it released a personal guaranty of his own. The tax code calls that a prohibited transaction, and the account stops being an IRA from the start of that tax year. The court held, at 682–83, that the account “is no longer exempt from creditors under section 42.0021.”

The failure to qualify can lie in the account’s form or in how the account is run. The account holder carries the burden of proving the exemption, but proof that the account is an IRA meets it unless the creditor comes forward with evidence that the account no longer qualifies. A self-directed IRA that holds real estate or a private company gives the owner ways to disqualify the account that a brokerage account does not.

Florida’s statute uses a different test, whether the account is run according to its own governing document, but the result in In re Yerian was the same. The owner had put two cars bought with IRA money in his own name and stayed in an IRA-owned condominium, and the account was seized for his creditors. The tax bill comes first in these cases; the owner in Yerian had conceded more than $100,000 in tax penalties before the creditor question was reached.

The 60-Day Rule After a Distribution

A distribution from a Texas retirement plan keeps its exemption for 60 days. After that it is exempt only as a rollover contribution. Only a handful of states protect money already paid out of a retirement account, and Texas does it through that window. A distribution parked in a checking account is an ordinary bank balance on day 61. Texas exempts nothing on deposit. The statute draws no line between a withdrawal the owner chose and a required minimum distribution. Each is an amount distributed, and each starts its own 60 days.

The rollover has to happen. In Nu-Way the distributions the debtor spent on a non-exempt asset were not exempt, because they were never rolled over. Texas has no exemption for cash, checks or negotiable instruments, so a distribution that is spent or simply held is exposed once the window closes. The list of qualified plans does include an annuity or similar contract bought with distributed plan money, on the same tax-status condition as every other item.

Bankruptcy changes the timing, but only in a Chapter 7 case. In In re Hawk, 871 F.3d 287 (5th Cir. 2017), the debtors claimed an IRA exempt when they filed, and no one objected within the 30 days the bankruptcy rules allow. They then emptied the account instead of rolling the money into another plan. The Fifth Circuit held that the money stayed out of the estate.

The exemption was fixed on the petition date, and Chapter 7 has no provision pulling a later withdrawal back in. The court added that money already distributed when the petition was filed would face the 60-day limit, and it distinguished Chapter 13, where the estate does take in property acquired after filing.

The Fifth Circuit applied the same reasoning to a homestead the next year, in In re DeBerry, 884 F.3d 526 (5th Cir. 2018). A home the debtor owned when he filed stayed exempt after he sold it during his Chapter 7 case, though he reinvested none of the proceeds. Outside bankruptcy neither decision applies. Against a judgment creditor in state court, every withdrawal gets the statute’s 60 days.

Which Creditors Still Reach a Texas Retirement Account

The IRS, a child-support lien, and a former spouse under a divorce decree reach a Texas retirement account that an ordinary judgment creditor cannot. Federal tax law overrides every state exemption, and the regulation says so directly: “No provision of a State law may exempt property or rights to property from levy” when the levy collects a federal tax (26 C.F.R. § 301.6334-1(c)). Neither an IRA nor a private employer plan is on the short federal list of property exempt from levy, so the IRS can reach either one.

A child-support lien under the Family Code is the one Texas claim the retirement exemption does not stop. The Property Code says its personal-property and retirement exemptions do not apply to that lien (Tex. Prop. Code § 42.005). The section makes one exception. Three accounts on the list stay exempt even against a child-support lien: the two Texas tuition plans and any state’s 529 program.

A divorce divides retirement accounts by a different route. An employer plan is divided by a qualified domestic relations order, the one express exception to ERISA’s rule against assigning benefits. An IRA is divided by a transfer to the former spouse under the divorce decree, which the tax code then treats as the recipient’s own account.

Texas also has a rule against buying exempt property to beat a creditor. The rule reaches personal property a person buys, improves or pays down with money that was not exempt. What the money bought stays reachable where the purpose was to defraud, delay or hinder a creditor’s collection (Tex. Prop. Code § 42.004). The deadline is two years after the transaction, or a year after judgment on an unliquidated or contingent claim. The rule covers every exemption in the same chapter of the Property Code, and the retirement exemption is one of them.

What Texas Retirement Protection Comes To

A Texan’s retirement money is beyond an ordinary judgment creditor while it sits in a tax-qualified plan, whatever the balance and however many accounts hold it. The exposure begins at the exit: 60 days after a distribution, the day an account stops qualifying, or, for an inherited IRA, the day a bankruptcy debtor elects the federal exemptions.

The same statute leaves cash, brokerage accounts and a deposited paycheck unprotected, and the rest of asset protection in Texas is about those assets.