Medical expenses can be a severe hardship. Even for those with medical insurance, a course of treatment for cancer can run up to more than $100,000. If you have an 80/20 plan -- also known as "20 percent coinsurance," that can still leave you with a $20,000 bill at the end of the year, plus a deductible. A 2005 Market Watch survey found that medical expenses contributed to 17 percent of all bankruptcies in America. However, Congress recognizes that while bills need to be paid, you also need to provide for yourself in retirement. Congress has therefore granted significant creditor protection to retirement accounts, including IRAs.
Bankruptcy Abuse Prevention and Consumer Protection Act
Among other provisions, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, also known as the Bankruptcy Reform Act of 2005, provides significant protection for assets held in IRAs from most creditors, including medical care providers. Specifically, federal law protects up to $1 million in IRA assets from the claims of creditors.
Other Retirement Assets
The law applies to both Roth IRAs and traditional IRAs. However, the law provides even greater protection for assets held in workplace-sponsored retirement plans, such as 401(k) plans, 403(b) tax-sheltered annuity plans, profit sharing arrangements and traditional defined benefit pension plans. Congress has provided unlimited creditor protection for these kinds of arrangements. Even the IRS may have trouble accessing these plans, depending on plan rules, though they may place a levy on any income that comes out of these retirement plans.
State Laws Apply
The $1 million protection that applies to IRAs is a minimum under federal law. Some states allow higher exemption limits. New York has unlimited creditor protection for IRAs, for example. Contact an attorney in your state for details about how state law may apply to your particular situation.
Considerations
It may make sense to convert a traditional IRA to a Roth IRA, especially if you have more than $1 million in the account, your state does not provide a higher exemption for IRA assets than the federal law requires, and paying income taxes on conversion would bring your account balance within the allowable $1 million eligible for creditor protection. You also want to think twice about rolling over any workplace retirement plan balances that would put you over the $1 million limit in IRAs. Depending on your state's laws, you can also supplement your creditor protection by using annuities, trusts and cash-value life insurance.
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