How to deal with an IRA during a Medicaid spend down?

The most powerful and effective option when it comes to dealing with an IRA during a Medicaid spend down is to transfer the IRA into a Medicaid Compliant Annuity (MCA). 

This transfer strategy, when done correctly, will convert a "countable asset" into income and accelerate your client's Medicaid eligibility. 

In most cases, there are two available methods used to transfer an IRA into an MCA:

60-Day Rollover Method:

This method is preferred as it can be done fast (1-2 weeks); however, the client is limited to one rollover every 365 calendar days:

• The client liquidates the desired amount from the IRA in the form of a check from their financial institution.
• Within 60 days, the funds must be reinvested into a tax qualified MCA, avoiding tax consequences.
• The client will receive a 1099-R and needs to make sure it is properly filed with their yearly income taxes.

Trustee-to-Trustee Transfer:

This method of transfer may require less work on the client's behalf; however, it can take much longer to complete (4-6 weeks):

• This transfer is carried out directly between financial institutions.
• The client will NOT receive a 1099-R and no immediate tax reporting is required.

Each method has pros and cons. Essentially, the method chosen is determined by time restraints and the needs of the client.  

If done improperly, liquidating an IRA can have severe tax consequences for your client. 

Because traditional IRAs are comprised of pre-tax funds, withdrawal of funds will trigger a taxable event. This can affect your client's tax liability in the following ways:

• Withdrawals are taxed in the year they are received
• The account holder could be pushed into a higher tax bracket
• If working with a married couple and their taxable income exceeds $44,000, more of their Social Security benefits could be taxable. 
• Medicare premiums could be increased. 

Fortunately, transferring funds into an MCA can help mitigate the tax consequences of liquidating an IRA. 

An MCA can spread out the tax liability over time, rather than all at once:

• Received payments are taxed by each calendar year. 
• The longer the annuity term is, the less tax liability there should be each year.

Ultimately, the goal of a Medicaid spend down plan is to accelerate Medicaid eligibility; however, careful consideration needs to be made when planning long term.