Commentary on HB 76, HB 1081 and SB 84

1999 Legislation:

Commentary on HB 76, HB 1081 and SB 84 --
Extending Exemption From Creditors' Claims
to Roth IRAs

A companion bill to HB 76 (by Rep. Solomons) was filed December 7, 1998 in the Senate by Senator Carona -- SB 84. Like HB 76, SB 84 is an attempt to extend the creditor protection now given to property held in a traditional IRA to Roth IRAs. Like HB 76, SB 84 is flawed -- it does not address the non-tax-deductible nature of Roth IRA contributions, it does not specifically address rollovers to Roth IRAs, and it may have effective date problems that threaten 1998 rollovers to Roth IRAs. HB 1081, another bill on the same subject, is better than HB 76 and SB 84.

SB 84 was referred to the Senate Jurisprudence Committee on January 26, 1999. [02/03/99]

A clear problem that needs fixing this session is the creditor protection afforded Roth IRAs. Texas's exempt property statute -- Tex. Prop. Code Sec. 42.0021 -- specifically provides an exemption for "any retirement annuity or account described by Section 403(b)" of the Internal Revenue Code. It also provides that the exemption does not apply to contributions to retirement annuities or accounts that are not tax deductible.

The Texas approach worked fine for traditional IRAs and qualified plans. However, with the advent of Roth IRAs, two problems emerged:

Roth IRAs are governed by Section 408A, not 403(b), so the statutory reference in Tex. Prop. Code Sec. 42.0021 does not expressly apply; and
By their very nature, contributions to Roth IRAs are not tax deductible; therefore, the exemption arguably does not apply.

The potential problem is made worse by the fact that there was a special one-year incentive for rolling over traditional IRA and qualified plan funds into Roth IRAs in 1998 -- the adverse income tax consequences of rollovers in 1998 could be spread over four years. No doubt countless Texans with large traditional IRAs availed themselves of this opportunity in 1998. By so doing, they may have exposed their exempt property -- traditional IRAs and qualified plans -- to creditors' claims.

HB 76 (by Rep. Solomons) was the first bill introduced to fix this problem. It was filed November 9, 1998, and was referred to the House Financial Institutions Committee on February 1, 1999. Rep. Solomons's bill has two potential problems: First, it only addresses the Section 408A/Section 403(b) problem; it does nothing to solve the non-tax-deductible contribution problem or the rollover problem. Second, the effective date provision calls into question the exempt status of 1998 Roth IRA rollovers.

A second bill, HB 1081 (by Rep. Janek) was introduced February 1, 1999. It does a better job than the Solomons bill of fixing the problem. First, it fixes the Section 408A/Section 403(b) snafu. Second, it makes an exception for Roth IRA contributions from the general rule that non-tax-deductible contributions to retirement accounts are not exempt from creditors' claims. Third, it includes the following specific statement: "Amounts considered qualified rollover contributions under Section 408A of the Internal Revenue Code of 1986 are treated as exempt amounts ..." under Tex. Prop. Code Sec. 42.0021.

HB 1081's approach is similar to the approach suggested by the Real Estate, Probate and Trust Law Section's proposed fix. To see the Section's proposed language, click here. I don't know if Rep. Janek's bill is the Section's bill or if another bill on the subject is likely to be introduced.

Even HB 1081 and the Section bill face a potential effective date problem -- since rollovers and contributions to Roth IRAs were made prior to the effective date of any new legislation, there may be no way to protect those funds from creditors' claims arising prior to the effective date. To do otherwise -- in other words, to in effect make the creditor protection retroactive -- may be an unconstitutional taking of a vested property right. Still, some fix is needed, and HB 1081 seems to be on the right track. [02/01/99]

HB 76 (By Rep. Solomons) would extend the exemption from creditors now enjoyed by owners of IRAs to owners of Roth IRAs established under IRC Sec. 408A. Note that, as introduced, HB 76 provides that: "The change in law made by this Act applies only to property that is subject to attachment, execution, and seizure for the satisfaction of debts on or after the effective date of this Act. Property that was subject to attachment, execution, and seizure for the satisfaction of debts before the effective date of this Act is covered by the law in effect when the property became subject to seizure, and the former law is continued in effect for that purpose." Where would this leave those big 1998 Roth IRA rollovers? The Real Estate, Probate and Trust Law Section of the State Bar of Texas has proposed a similar, but not identical, change regarding Roth IRAs, but (as of January 8, 1999) the Bar's bill has not yet been introduced. to view a draft of the Bar bill. [01/08/99]