The Flammia Myth-Information Series – Part 6: What Happens to My Retirement Account

If someone you love needs nursing home care and you want Medicaid to foot the bill, what happens if your loved one has a retirement account?

This is another area where misinformation abounds. Yes, qualified retirement accounts like Individual Retirement Accounts (IRA) and 401ks are usually large assets that Medicaid considers countable under their current rules. If you’re relying on relatives for advice, or even on professionals like attorneys or financial advisors who aren’t familiar with Medicaid rules, you’ll get all sorts of conflicting opinions on what should be done with these accounts.

It’s true that without proper Medicaid Planning, hefty retirement accounts will likely prevent someone from being eligible for Medicaid. How do elder law attorneys turn a 401(k) or IRA into an asset that is exempt or non-countable by Medicaid?

One of the best options is to turn the retirement account into an income stream. Under Medicaid rules, if you have periodic payments from retirement accounts, Medicaid doesn’t count the whole value of the retirement account as an asset.

How is this done? Just before the Medicaid application is submitted, our office will work with the financial advisor or holding institution to put the retirement account into payout status, taking the required minimum distribution (RMD). If this is done properly, then Medicaid will not count the IRA or 401k as an asset. It’s important to get professional help to do this so that the retirement account would be counted as an income stream.

Once you’re taking the RMD, the IRA or 401k is no longer counted as an asset by Medicaid. But this creates a new problem. Now that the retirement account is producing a monthly income, the Medicaid applicant now has an extra source of income. If that places the Medicaid applicant over the current income limit ($2,313), then we  maintain applicant’s  Medicaid eligibility  by establishing a Qualified Income Trust.

If the Medicaid applicant is younger than 59 ½, which is often the case with seniors experiencing early onset Alzheimer’s disease and other chronic conditions, there will likely be IRS tax consequences on the early withdrawal. No one likes paying more taxes then they need to, but the savings realized when Medicaid pays for a huge portion of expensive long-term care costs usually makes the extra tax liability worth it in the end.

If well-meaning relatives, friends, or advisors are telling you that you must liquidate your own or a loved one’s retirement account, please get a second opinion from an elder law attorney with experience in Medicaid Planning. You don’t have to cash it in. You can leave it to your spouse and children as named beneficiaries. If you’d like help thinking through the options to choose what’s right for you, give the Flammia Elder Law Firm a call. We would be happy to help.

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