For many Medicaid applicants, individual retirement accounts (IRAs) are one of their biggest assets. If you do not plan properly, IRAs can count as an available asset and negatively affect Medicaid eligibility.
Medicaid applicants can have only a small amount of assets to be eligible to receive benefits ($2,000 in most states). Certain assets – i.e., a house, car, and burial plot – are usually exempt from eligibility determinations. Whether your IRA counts as an exempt asset depends on whether it's in "payout status" or not.
How Medicaid Treats Traditional IRAs
At a certain age, individuals must begin taking required minimum distributions (RMDs) from their traditional IRAs. (An RMD is the minimum amount a retiree has to withdraw annually from their retirement account. Read more about the latest RMD rules and regulations.)
Payout Status
If you are regularly withdrawing at least the RMD from your IRA, it means that the IRA is in payout status. When an IRA is in payout status, some states will not count the IRA as an available asset. This is a plus if you are looking to qualify for Medicaid. As mentioned above, having too many assets can work against you, preventing you from being able to access Medicaid benefits.
To qualify for Medicaid, not only do your assets need to fall under a certain threshold, but your income does, too. Unfortunately, the payments you receive from a traditional IRA will in fact count as income. Medicaid recipients can keep only a tiny amount of income for personal use; the rest will go to the nursing home. (Each state decides what the income limit should be for people applying to Medicaid.)
If the IRA is not in payout status, it is a non-exempt (or "countable") asset in the eyes of Medicaid. This means the total amount in your IRA would probably count as an asset, likely affecting your Medicaid eligibility. To qualify for Medicaid in this case, you may have to cash out your IRA and spend down your assets.
Another option is to transfer the money to your spouse or someone else. However, you should be aware that there will likely be an income tax penalty for doing this.
How Medicaid Treats 401(k)s and Roth IRAs
The rules for a 401(k) are similar to an IRA. If the 401(k) is not in payout status, Medicaid may count any funds that are available to withdraw as assets. (This is the case even if you have to pay a tax penalty.)
Note that the rules for a Roth IRA, however, may be different. Roth IRAs have no required minimum distributions and so can't be in payout status. Therefore, your state Medicaid agency may count your Roth IRA as an asset. If you have a Roth IRA, it may not be exempt at all, depending on your state.
Connect With an Expert
The rules regarding IRAs, 401(k)s, Roth IRAs, and Medicaid are extremely complicated and vary from state to state. Be sure to speak to a qualified attorney about your IRA to determine the best course of action for you. Find an elder law attorney near you who has expertise in Medicaid today.
Learn more about these types of retirement accounts in the following articles:
- What Is the Difference Between a 401(k) and an IRA?
- Inherited Retirement Accounts: Minimizing the Tax Consequences
- IRS Finalizes 10-Year RMD Rules for Inherited IRAs
- How to Protect an IRA From Heirs' Creditors
You also may want to read other articles on the topics of retirement planning and Medicaid's rules.