Can Not Paying Your Hospital Bill Affect Your IRA Account?

Bankruptcy can protect your IRA.
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A 2013 study by NerdWallet Health finds that 20 percent of Americans are struggling to pay medical bills. The results show that 35 million adults will be contacted by collection agencies for unpaid medical bills, and 1.7 million live in households that will declare bankruptcy because of medical costs. Knowing your individual retirement account status can help you respond to a crushing hospital bill.

IRA Protection

The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act shields $1 million of IRA money from creditors. However, to receive this protection, you must declare bankruptcy. Your hospital might come after you for an unpaid bill, but at least you can protect your IRA. The situation changes if you choose to avoid bankruptcy. You are then at the mercy of state laws, so your IRA could be at risk. State courts administer creditor lawsuits.

State Laws

Many states offer creditor protection for IRAs, even if you avoid bankruptcy. However, some states, including California, Georgia, Maine, South Carolina and Wyoming, offer only partial protection. For example, a California judge can decide how much money you’ll need for retirement and hand the remainder of your IRA over to creditors. Other states, including Alabama, Hawaii, Indiana, Mississippi and Montana, have laws protecting traditional IRAs, but not Roth IRAs.

Early Withdrawals

If you are concerned about your credit rating or possible lawsuits, you might decide to use IRA money to help pay a hospital bill. Any money you withdraw from a traditional IRA is taxable. Furthermore, if you are younger than 59 1/2, the Internal Revenue Service might slap a 10 percent penalty on the money you withdraw. However, you can grab a penalty exception for the part of unreimbursed medical bills that is greater than 10 percent of your adjusted gross income. If you suffer from a condition that has left you disabled, you can withdraw any amount from your IRA penalty-free.

Employer Retirement Plans

If you are considering moving a qualified pension plan to an IRA and are concerned about an unpaid hospital bill, you might want to rethink the rollover. Qualified plans -- including 401(k)s, 403(b)s and 457s -- are completely protected under the Employee Retirement Income Security Act from creditors. The courts have not yet made clear whether a rollover from an employer plan to an IRA loses this protection. If you've recently made this kind of rollover, you might be able to roll it back. This assumes you still have access to your old account and that you didn't mix rollover and non-rollover money, which can cause your employer plan to refuse the new rollover.

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