Using IRAs to Fund Medicaid Compliant Annuities
Date Listed: January 3, 2020
Presented By: Alex Thompson, Benefits Planner
Join us for episode 5 of Industry Insights, a new video series where we discuss the latest from the elder law community!
Episode 5 features one of our Benefits Planners, Alex Thompson, who spends time discussing a strategy we’re often asked about: funding Medicaid Compliant Annuities with an IRA. Alex takes an in-depth look at how this strategy can help clients avoid potential tax consequences and the methods in which an IRA can be transferred to a Medicaid Compliant Annuity without tax penalties. He also provides advice and expectations for attorneys using this strategy.
Amy: Hello, I’m Amy Beacham, Communications Director for Krause Financial Services. Welcome to episode five of our Industry Insights series. In this series, we aim to discuss news, updates, and hot discussion topics that affect the elder law space and that are relevant to you as an elder law attorney. Working on hundreds of cases per month and working with attorneys from across the country, we see trends that affect elder law planning, and we want to share some of those insights with you today. Today, we have one of our Benefits Planners, Alex Thompson. Alex has been with Krause for over three years now and has worked on hundreds of crisis Medicaid planning cases. Recently, we’ve been receiving a lot of questions on how using an IRA to find a Medicaid Compliant Annuity can benefit your clients as well as the logistics that play a part in the process. Today, Alex is going to share some of his insights with us. Welcome, Alex.
Alex: Hi. How’s it going, Amy?
Amy: Good. How are you?
Amy: Good. So, why might an attorney consider using an IRA to fund a Medicaid Compliant Annuity?
Alex: So, in a lot of states, the IRA is going to be a countable resource, so the only way to properly spend their client down is going to be to either cash it out and get a huge tax hit or they can convert that tax-qualified account into a tax-qualified Medicaid Compliant Annuity. And then, from there, instead of facing the giant tax burden, the funds are then taxed as they make payments.
Amy: Okay. And as a side note for our viewers, if you’re not sure if an IRA is countable in your state, we do have all of those resources available on our state pages in your Attorney Access account. If you don’t have an account, you can sign up–it’s quick, easy, and free–at medicaidannuity.com. Okay, back to what we were talking about. Funding a Medicaid Compliant Annuity with an IRA is a great option to avoid those immediate tax consequences. So, how can we move the funds to the Medicaid Compliant Annuity without incurring any consequences?
Alex: So, they’re essentially going to have two options. They’re either going to be able to do a Trustee-to-Trustee Transfer or a 60-Day Rollover. The Trustee-to-Trustee Transfer–the client is essentially going to be doing some additional paperwork that allows the MCA company to request the funds on the client’s behalf. And then, the other option being the 60-Day Rollover. So, on that option, the client’s going to have to contact the custodian company and request a liquidation of that account without having taxes withheld. Now, the key point to remember on the 60-Day Rollover is there’s only one that’s allowed per year.
Amy: Okay. So, it sounds like, with the Trustee-to-Trustee Transfer, it’s really the two companies–the IRA custodian company and the insurance company–that are working together to move those funds. Whereas, with the 60-Day Rollover, the client has to be the one to initiate that transaction.
Alex: Yeah, the main difference between the two is, in one situation, the client’s never seeing the funds hit their bank account, and the other option is the Trustee-to-Trustee Transfer. They’re going directly between the custodian company and annuity company.
Amy: Okay. From my perspective, that makes the Trustee-to-Trustee Transfer sound a little more favorable, a little easier on the client. And then you also mentioned that with a 60-Day Rollover, there’s a one-per-year rule. Can you explain that a little bit?
Alex: Yeah, so it’s not one per calendar year. It’s one per 365 days. And that also pertains to the number of accounts they have, too. So, they can only do one…
Amy: One per taxpayer.
Alex: Yeah, one per taxpayer.
Amy: Okay. So, you can’t do a rollover in December 2019 and then do one again in January 2020. Okay. And then, with… we only have the option of doing one per taxpayer. If they have multiple accounts, they could do one rollover and then multiple transfers. Would you recommend that? Or would you recommend just going with all transfers?
Alex: Yeah, if there are multiple accounts, obviously, I think, from a cleanliness standpoint, the Trustee-to-Trustee Transfer is definitely going to make the most sense. It’s less… going to end up being less in the long run for the client to worry about.
Amy: Okay. Now, when dealing with IRAs and taxable income and all that good stuff, I’m sure we get a lot of questions come tax season. Can you explain that a little bit?
Alex: Yeah. So, first and foremost, anytime we’re dealing with tax-qualified funds, heavily recommend that the client works with a tax professional or CPA just because it is a very complex nature… or complex business. So, the main thing to remember, too, is when dealing with a 60-Day Rollover, they are going to be sent a 1099-R that’s going to show the distributions and the taxable amount. They’re going to have to report the rollover. And then, the custodian company, mid-April, is going to send a 5498 to the IRS and also to the client that’s going to show the contribution. As long as the contribution matches the distribution, from the 5498 to the 1099-R, there’s no taxable event.
Amy: Okay. So, that does sound a little complicated with a 60-Day Rollover. It sounds like they’re going to have to do some additional paperwork and some additional work on them come tax season. Now, with a Trustee-to-Trustee Transfer, do we have to do that same process?
Alex: No, it’s pretty much business as usual with a Trustee-to-Trustee Transfer. It pretty much takes out all of the work out of the client’s hands because the custodian companies are the ones that have handled it. So, that’s definitely going to ease things up a little bit for them.
Amy: Sure. Okay, so from an ease standpoint, this would be another reason why maybe the Trustee-to-Trustee Transfer is a little more favorable… assuming timing isn’t a factor for the client. I can understand that if they’re trying to go really fast through this process and they only have one account, that they might want to favor a 60-Day Rollover.
Alex: Yeah, every situation is going to be unique. The one thing to factor, though, with all these options is the, as you said, the timing standpoint. The Trustee-to-Trustee Transfer typically takes between four to six weeks, whereas a 60-Day Rollover, once the client requests those funds, it typically is only about five to seven business days. So, whenever there’s a time factor that’s involved and we’re on a time crunch, we’re probably always going to recommend doing a 60-Day Rollover. Whenever we have the luxury of time, obviously the Trustee-to-Trustee Transfer is going to be the way to go. It’s going to be a lot smoother process, come tax season, for the client.
Amy: Okay. Now, any other tips or advice you have for attorneys looking to use this strategy?
Alex: So, again, going to highly recommend that the client works with a tax professional or CPA. The other factor when considering the transfers is, typically, there’s going to be a financial advisor that’s involved. They’re not typically too keen on having those funds leave their account, so I would just heavily stress the importance of everything being done in a timely manner and also that this is for Medicaid purposes… just because if you’re looking at a client spending $5,000 to $8,000, $10,000 per month in facility costs, I think it’s pretty easy to understand why they want to be getting those benefits.
Amy: Sure. It’s a matter of explaining the economic crisis the client really is in. It goes beyond making sure the client has a sound investment. It’s really about that Medicaid eligibility by that point.
Alex: Yeah, it’s crisis planning. It’s not an investment tool. So, that’s the key thing to stress when making that determination.
Amy: Okay, great. Well, that was very helpful. Thank you very much for your time.
Alex: Yeah, you’re welcome.
Amy: For more information on how a Medicaid Complaint Annuity can help your client and how to deal with an IRA in these cases, be sure to contact our office. If you have any other questions on how Krause can help you in your practice, just give us a call at 855-552-5893. I’m Amy Beacham, and thanks for watching.
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