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Dealing with IRAs

Hi, I’m Amy Beacham, Communications Director for Krause Financial Services.  Today, we’re going to talk about dealing with IRAs when planning for Medicaid.

Treatment of IRAs varies from state to state. In a few lucky states, IRAs belonging to either spouse are considered exempt assets. In some states, IRAs belonging to the community spouse are exempt while those belonging to the institutionalized spouse are countable. In most states, however, an IRA belonging to either spouse is countable for Medicaid, meaning the account likely must be spent down in order to achieve eligibility.

If your client liquidates the account, they could face some hefty economic consequences, including taxation of the account at an elevated rate, 85% of the Social Security benefits becoming taxable, and an increase in Medicare premiums. The better solution is to transfer the IRA to a Medicaid Compliant Annuity, or MCA.

The transfer is not a taxable event, and the IRA is eliminated as a resource because the MCA has no cash value. Rather, the owner immediately begins receiving a stream of income. The income is taxable within the year of receipt, meaning tax consequences associated with liquidating the account are spread out over the term of the annuity.

Transferring the IRA to an MCA is simple. It can be done by Trustee-to-Trustee Transfer or by 60-Day Rollover. The Trustee-to-Trustee Transfer involves the owner completing some paperwork that allows the MCA company to obtain the funds directly from the IRA custodian. A 60-Day Rollover involves the owner contacting the IRA custodian directly to request a liquidation of the funds without withholding taxes. The owner then has 60 days to reinvest the funds into the MCA. Just remember, an individual can only perform one 60-Day Rollover per one-year period.  There is no limit on the number of Trustee-to-Trustee Transfers.

If you’re planning for a community spouse, this method is a quick way to eliminate the IRA as an asset and provide extra monthly income to the owner. With the countable assets spent down, the institutionalized spouse can qualify for Medicaid.

But what if the institutionalized spouse owns the IRA? Don’t worry, we have a solution for that as well. Ownership of the account cannot be transferred without incurring tax consequences, so instead, we use a method called the “Name on the Check Rule.” This involves the institutionalized spouse transferring their IRA to an MCA and naming the community spouse as payee. The institutionalized spouse is the owner; however, the community spouse’s name is on the monthly check, meaning the income is only available to them.

Regardless of your client’s situation, we have solutions for their Medicaid eligibility. If you’d like to learn more about your client’s options when dealing with an IRA, contact our office at 855-552-5893 to speak with a Benefits Planner.


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