How to Handle IRA Funds in Medicaid Planning
Disclaimer: Since Medicaid rules and insurance regulations are updated regularly, past blog posts may not present the most accurate or relevant data. Please contact our office for up-to-date information, strategies, and guidance.
Since IRAs are a very common asset amongst seniors, it’s vital to understand how to deal with these accounts in crisis Medicaid planning. For starters, an IRA is considered a countable asset for Medicaid in most states, so these cases typically involve spending down the IRA and transferring the funds to a Medicaid Complaint Annuity (MCA).
Are IRAs Countable or Exempt in Your State?
To learn about the specific Medicaid requirements for your state, including how IRAs are treated,
view your state resources.
Consequences of Liquidating an IRA
Since traditional IRAs contain pre-tax funds and funds are taxed upon withdrawal, liquidating the account often results in hefty tax consequences, including:
- All funds count as taxable income in the year of receipt.
- The account holder may be subject to a higher income tax bracket.
- If a married couple’s total income for the year exceeds $44,000, up to 85% of their Social Security benefits become taxable.
- If a married couple’s total income for the year exceeds $194,000, their Medicare Part B and Part D premiums will increase.
Transferring IRA Funds to an MCA
If your client resides in a state where their IRA is countable for Medicaid purposes, they have two options to fund the account into an MCA: Trustee-to-Trustee Transfer or 60-Day Rollover. In order to avoid immediate tax consequences, the ownership of the IRA must remain the same.
Trustee-to-Trustee Transfer
A Trustee-to-Trustee Transfer takes place directly between plan administrators. Along with the MCA application, the account owner fills out authorization paperwork for the transfer, and the insurance company issuing the MCA obtains the funds directly from the custodian company. The entire transfer process may take four to six weeks.
60-Day Rollover
To complete a 60-Day Rollover, the account owner contacts the IRA custodian company and initiates a complete liquidation of the account without withholding any taxes. The account owner then receives the liquidation check, usually within five to seven business days. As long as they reinvest the funds into a tax-qualified MCA within 60 days, they will avoid immediate tax consequences.
| Trustee-to-Trustee Transfer | 60-Day Rollover |
| Custodians handle the transfer | Client handles the transfer |
| May take four to six weeks | May take less than four weeks |
| No time limit for completion | 60-day time limit for completion |
| Client does not receive a 1099-R | Client receives a 1099-R |
| Client does not receive Form 5498 | Client receives Form 5498 |
| No limit on the number of transfers | Limit of one rollover per 365-day period |
Taxation of IRA Funds
Since contributions to a traditional IRA are made pre-tax, the funds are taxed upon withdrawal. Transferring the IRA to an MCA spreads out the tax consequences over time since the taxation occurs in the year each payment is made rather than all at once. This means that the longer the MCA term, the greater the economic benefit for the client.
Transferring a traditional IRA to an MCA spreads out the tax consequences over the entire annuity term.
Read More: What Is the “Name on the Check Rule” MCA Strategy?
To learn more about dealing with IRAs in Medicaid planning, contact our office.