Contrary to a handful of states' Medicaid rules, which consider a Medicaid applicant's and/or the community spouse's Individual Retirement Account ("IRA") strictly as income if he or she is receiving the Required Minimum Distribution ("RMD"), the Veterans Administration ("VA") considers an IRA to be a countable resource and the RMD to be countable income. In order to meet the asset and income limitations of the VA, exchanging the IRA for a tax-qualified immediate annuity will convert a countable resource into an income stream. Furthermore, by converting the IRA into a tax-qualified immediate annuity, the individual is not subject to immediate income taxation on the full account value.
Two options are available when converting an IRA into a tax-qualified immediate annuity - an IRA Transfer and an IRA Rollover.
An IRA Transfer is done by initiating a direct plan administrator to plan administrator transfer from the current custodian to the insurance company providing the immediate annuity. This is accomplished by having the applicant complete a transfer form which authorizes the insurance company issuing the immediate annuity to obtain the funds directly from the company holding the IRA. It is important to know that this transfer does not trigger a taxable event. Also, by maintaining the tax-qualified status, the applicant is neither subject to an early withdrawal penalty nor immediate income taxation on the full account value. However, this process can take between two weeks to two months to complete, thus delaying VA eligibility until the transfer is complete.
An IRA Rollover is accomplished by having the applicant simply liquidate the present IRA and reinvesting the funds into the immediate annuity. The liquidation check is usually received within five to seven business days of the request, and as long as the funds are reinvested into the tax-qualified immediate annuity within 60 days income tax consequences will be avoided. In that timing is of the essence, most applicants tend to proceed with an IRA Rollover.
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