Annuitizing IRAs: Will My Clients Still Meet Their RMDs?

Annuitizing IRAs: Will My Clients Still Meet Their RMDs?

In most states, IRAs are considered countable assets for Medicaid purposes.  Rather than liquidate an IRA and risk facing large tax consequences, the client may be able to rollover or transfer his or her IRA into a Medicaid Compliant Annuity (MCA).  The IRA is eliminated as a countable asset, and immediate tax consequences are avoided.  The income from the MCA is taxable in the year of receipt, allowing the owner to spread any tax consequences out over the term of the annuity.

What About RMDs?

Beginning at age 70 ½, and each year thereafter, an individual is obligated to withdraw at least a certain portion of his or her IRA as income for the year, known as the Required Minimum Distribution (RMD).  An individual’s RMDs are calculated based on age and the value of the IRA as of December 31 of the previous calendar year.  Many attorneys and their clients are concerned they won’t meet their RMDs after purchasing the MCA.

Tax-qualified MCAs, however, are actually not subject to RMDs.  MCAs are Single Premium Immediate Annuities (“SPIAs”) with added restrictions.  A SPIA provides an irrevocable and guaranteed[1] stream of income, and contains zero cash or surrender value.  Because of this, the Internal Revenue Service considers future RMDs satisfied, and the amount invested into the annuity not subject to annual RMD calculations.

[1] The stream of income produced by a SPIA is guaranteed either for a specific term certain or for the lifetime of the individual.  For purposes of MCA planning, the income is guaranteed for a specific term certain.

What if My Client Isn’t 70.5 Yet?

Annuitizing a client’s IRA as part of a crisis Medicaid plan is a great option to avoid the immediate tax consequences, regardless of whether or not your client is currently obligated to take RMDs.  Assuming the MCA is still paying out by age 70 ½, the client will not have worry about taking his or her RMDs for the annuity funds at that time, as the information noted above will still apply.

When is it Appropriate for My Client to Annuitize an IRA?

In states where IRAs are countable in Medicaid planning, and the client has excess assets above his or her resource allowance, annuitizing an IRA is a great way to spend-down the asset and accelerate Medicaid eligibility.  In cases that involve married couples, if the community spouse has an IRA, the account can be transferred to an annuity for his or benefit.  In some states, if the institutionalized spouse has an IRA, the couple could consider using the “Name on the Check Rule,” in which the institutionalized spouse’s IRA is transferred to an annuity for the benefit of the community spouse.

 

Specific guidance on whether or not annuitizing an IRA is appropriate is dependent upon the type of case, anticipated premium amount, and anticipated annuity term.  Krause Financial Services offers complimentary case analysis and guidance.

 

For more information on planning with tax-qualified funds, view our recent webinar, “Protecting an IRA: Medicaid, Institutionalized Spouse, and the ‘Name on the Check’ Rule.

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