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In many states, an IRA owned by the community spouse is a countable resource for Medicaid purposes.  In order to protect the account from a Medicaid spend-down and qualify the institutionalized spouse for Medicaid benefits, the community spouse will be advised to purchase a Medicaid Compliant Annuity.  The purpose of the Medicaid Compliant Annuity is to convert a pile of cash (the IRA) into a monthly stream of income.  Once annuitized, the community spouse is no longer over-resourced, and the institutionalized spouse is eligible for Medicaid benefits.

For federal income tax purposes, each monthly payment received by the community spouse from the Medicaid Compliant Annuity in a calendar year will be taxable income in that year.  If the couple files a joint return the income will be listed on that return.

What impact does the monthly payment of the Medicaid Compliant Annuity have on the institutionalized spouse's monthly co-pay to the nursing home?  If the community spouse, prior to the purchase of the Medicaid Compliant Annuity, had monthly income from social security and pension in excess of his or her monthly maintenance needs allowance ("MMNA"), the purchase of the Medicaid Compliant Annuity would not change the institutionalized spouse's monthly co-pay to the nursing home.  The nursing home would still receive the institutionalized spouse's monthly income from social security and pension, less what he or she pays for health insurance and his or her personal needs allowance.

If the community spouse does not need the monthly income from the Medicaid Compliant Annuity, is less than 70.5 years of age, and is not subject to required minimum distributions, is there a way for the community spouse to reinvest the monthly payments back into an IRA without subjecting them to federal income tax?  The answer is "yes."  It would be accomplished by way of a "tax-free rollover."