As Americans live longer, more are eventually coming to need long-term nursing home care. The cost of this can be devastating to a family. Nursing home care now costs an average of over $85,000 per year, and much more than that in some parts of the country.
Medicaid is a government program that can pay for long-term nursing home care. But it is intended to help low-income and low-wealth individuals. It generally won’t pay for care on behalf of individuals who have significant wealth until after they spend it down on their own care.
An IRA is an asset that can be placed at risk by Medicaid’s rules. But with planning, an IRA can be protected. Here’s what to know.
First, be aware that Medicaid is a joint state and federal program. Rules for Medicaid vary significantly by state. To plan effectively to get the most benefit from Medicaid at the least cost, you must consult with an expert on your state’s Medicaid rules. This article explains general ideas you can consider with your expert advisor.
To receive Medicaid benefits, an individual can own only a small amount of assets. This usually is only about $2,000, but varies by state. Additionally, a house, household furnishings, car, and burial plot are exempt from the asset count.
An IRA may or may not be an “available asset” that is included in the asset count. The key is whether the IRA is in “payout status”. An IRA is deemed to be in payout status if the owner is taking required minimum distributions (RMDs) from it. When an IRA is in payout status it is not an available asset. The owner can keep the IRA.
There is a trap here for owners of Roth IRAs. A Roth IRA has no RMDs, so it can never be in payout status. Thus, a state may consider a Roth IRA to be an available asset, no matter the age of the owner, and require it to be spent down before Medicaid benefits are provided. This is a rare instance where owning a Roth IRA is clearly disadvantageous compared to owning a traditional IRA.
IRS-required RMDs that establish payout status do not begin until age 70 1/2. However, at an earlier age, it may be possible to remove an IRA from one’s available assets by converting it to a tax-qualified annuity IRA. This eliminates the balance of the IRA as an asset and leaves only an income stream. Purchasing an annuity within your IRA may accomplish this.
RMDs themselves are income subject to Medicaid’s claims. Much or most of each RMD may have to be paid to the nursing home in partial payment of its fees. RMDs that are too large may disqualify one from being eligible for Medicaid.
An alternative method of saving an IRA from Medicaid is to liquidate it by spending it down. Spend-down rules, which determine permissible spending and transfers, also vary by state. But with the help of an expert advisor you may be able to make transfers that help your family without suffering a Medicaid penalty.
The simplest and safest way to do this is by transferring funds to others more than 5 years (60 months) before applying for Medicaid benefits. Such transfers escape Medicaid claims entirely.
Example: A senior family member in his 70s has a million-dollar Roth IRA that he plans to leave to heirs. However, there are signs that his health is beginning to fail. He’s is worried that if he comes to need nursing home care and lives into his 90s the cost could wipe out the entire IRA. He can withdraw the balance of the Roth IRA tax-free now and transfer it to heirs, or to a trust set up on their behalf. Or, to be sure he can pay his medical bills for the five years, he may leave some funds in the IRA, perhaps transferring $700,000 and keeping $300,000. If five years pass before he makes a Medicaid application the transferred funds will be free of all Medicaid claims.
Plan well in advance to deal with the risk of incurring the cost of nursing home care, perhaps by buying long-term care insurance. When purchased at an early enough age, a reasonably priced policy can be integrated into a financial-and-estate plan that alleviates all these concerns.
Remember, the need for nursing home care can strike the young too, as the result of accident or disease. The cost can be calamitous to a family at any age.
Consult with a state Medicaid law expert about protecting your family, and about using any of the ideas given here before acting.