Medicaid Planning With an IRA: You Can Do What?!

By Fredrick P. Niemann, Esq. of Hanlon Niemann, a NJ Medicaid Law Firm

In some states an IRA is an exempt resource for Medicaid eligibility. But not in New Jersey. In this state an IRA is countable for both spouses. So what do you do with your IRA(s) in a crisis Medicaid application? An IRA can be converted into a Medicaid Compliant Annuity, commonly called a “SPIA” without incurring immediate tax consequences. How is this accomplished? Easy. Simply liquidate the account(s). By following a few guidelines, Medicaid eligibility can be accomplished while minimizing income tax consequences.

(1)  Transferring the Funds

The IRA owner has two options: (1) a direct transfer or (2) a 60-day rollover. The insurance company issuing the SPIA obtains the funds directly from the company holding the IRA.

The 60-day rollover takes place when the owner requests a liquidation of his or her IRA without withholding taxes and takes control of the actual funds. Within 60 days of receipt the owner needs to fund the new annuity contract.

 

(2) Pay Attention to Ownership

In order to avoid tax consequences, the ownership of the new annuity must match that of the original IRA. However, this poses a problem in cases where an institutionalized spouse owns a sizable IRA. If, for example, Bill enters a nursing home while Tina continues to live at home. Bill has a large IRA. If Bill transfers his IRA to Tina, it will create a taxable event. Instead, Bill converts his IRA to a Medicaid Compliant Annuity, and designates Tina as the irrevocable payee. The income to Tina will not be considered when your County Board of Social Services decides whether Bill is Medicaid eligible or not.

The “name on the check” rule is the common guideline used by Medicaid in determining who owns the income. If a check is made payable to a particular individual, that individual is considered the owner of the income.

If you have questions regarding MLTSS (Medicaid for Long Term Support Services), please contact Fredrick P. Niemann, Esq. toll free at (888) 431-8567 or email him at fniemann@hnlawfirm.com. He welcomes your inquiries.