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How Can I Protect My IRA From Medicaid?

how can i protect my ira from medicaid

While you might not imagine yourself saving up for retirement only to transfer your IRA to a nursing home or the government, this situation can become a reality for retirees who don’t prepare for this possibility. Fortunately, you can protect your IRA from Medicaid and receive state assistance for long-term care by understanding your state’s Medicaid requirements. Here’s what to know and how to prepare for retirement with an IRA. You may also want to talk to a financial advisor to help you with your unique circumstance.

How IRAs / 401(k)s Impact Medicaid Eligibility

Since Medicaid programs vary by state, your IRA’s effect on eligibility depends on your location. Specifically, your state will categorize each of your assets as non-exempt or exempt. Non-exempt assets count toward your eligibility, meaning your wealth could prevent you from qualifying for assistance.

It bears repeating that your state’s regulations will ultimately determine your eligibility. For example, the state of New York counts IRA and 401(k) funds against eligibility unless you’re receiving required minimum distributions (RMDs) or more from the account.

State Medicaid Regulations For IRAs

See the chart below for a rundown of state Medicaid regulations for IRAs:

StateApplicant’s IRARMD Status Required for ExemptionApplicant’s Spouse’s IRARMD Status Required for Exemption
District of ColumbiaExemptNoExemptNo
New HampshireCountableN/ACountableN/A
New JerseyCountableN/ACountableN/A
New MexicoCountableN/ACountableN/A
New YorkExemptYesExemptYes
North CarolinaCountableN/ACountableN/A
North DakotaExemptNoExemptNo
Rhode IslandExemptYesExemptYes
South CarolinaExemptYesExemptYes
South DakotaCountableN/ACountableN/A
West VirginiaCountableN/AExemptNo

Importance of Medicaid’s Asset Limit

how can i protect my ira from medicaid

Qualifying for long-term Medicaid requires applicants to have minimal assets. For example, in most states, you must pay out of pocket for nursing home care or in-home care assistance if you have more than $2,000 in assets as an individual or $3,000 for a couple. If you’re under the limit, you can receive an HCBS Medicaid Waiver. However, the dollar limit can change by year if the government updates its regulations.

In addition, some states have exceptions to their asset rules. For instance, New York limits individuals to $30,182 and couples to $40,821.  In California, the asset limit is even higher at $130,000 for an individual and $195,000 for a couple.

Certain assets are exempt and not counted towards Medicaid’s asset limit in most states. These exemptions typically include your primary residence, vehicles, furniture and pre-paid funeral contracts. Likewise, your state may include your IRA in this list, as stated in the chart above.

Factors Impacting How Retirement Plans Impact Medicaid Eligibility

Whether your state exempts your IRA isn’t the only aspect to consider. The following also influence Medicaid eligibility and IRA exemption:

1. Payout Status

Some states only ignore IRAs if you’re receiving distributions when you apply for Medicaid. Otherwise, your account’s entire value will count as an asset. On the other hand, if you’re receiving distributions, the monthly payment may count toward eligibility (fortunately, a $1,500 payment is less likely to hinder qualification than a $500,000 fund).

Furthermore, your distributions must meet RMD regulations. Specifically, the SECURE 2.0 Act requires retirees to take RMDs at age 73. In addition, this law will push the age to 75 in 2033. Remember, receiving RMDs every month (or higher amounts, if needed) put your IRA in payout status. Lesser amounts don’t activate this status.

2. Distribution Size

After ensuring your distribution size meets RMD standards, your payments must be under state limits. Your state likely caps IRA incomes at $2,742 per month before cutting off Medicaid assistance. However, it’s best to research your state’s laws to know your limit. In any case, your distribution must fall between the RMD minimum and state-set maximum to receive Medicaid.

3. Account Type

Traditional IRAs can gain payout status through RMDs and become exempt from Medicaid eligibility determination. On the other hand, Roth IRAs don’t have RMDs or income taxes. As a result, your Roth IRA could sit untouched for your entire retirement without incurring penalties, distributions or tax implications. These characteristics are generally helpful for your financial situation but not for Medicaid. Because a Roth IRA can’t go into payout status, your state will count it against your Medicaid eligibility.

4. Accessibility

Your IRA may allow you to completely drain the funds in the account in one shot. If so, your state might count the account as an asset because of its liquidity.

5. Marital Status

Lastly, marital status can affect eligibility. State laws for a spouse’s income run the gamut from counting it in all situations to not counting it regardless of your spouse’s income or payout status. Therefore, if you’re married, it’s best to familiarize yourself with your state’s community spouse resource allowance when you apply for Medicaid.

Can Medicaid Take an Applicant’s Spouse’s Retirement Plan?

Your state might count your spouse’s retirement plan as part of your assets. You can refer to the chart above to see which states count your spouse’s IRA toward your eligibility and whether the IRA’s payout status influences exemption.

Because state treatment of a spouse’s IRA varies across the country, it’s crucial to understand your state regulations before applying to Medicaid. You can also hire a professional Certified Medicaid Planner (CMP) to set up a Medicaid-friendly retirement plan. Otherwise, you could jeopardize your eligibility and your spouse’s retirement account.

How Can I Protect My IRA From Medicaid?

You have three primary options for protecting your IRA from Medicaid and qualifying for long-term care benefits. Although these strategies have costs and limitations, they can be more helpful than spending down your or your spouse’s IRA:

Medicaid Asset Protection Trust

Your first option is creating an irrevocable Medicaid asset protection trust and transferring IRA funds that exceed Medicaid’s limits. This way, your IRA’s funds will fall beneath the eligibility threshold. Beware, the funds transferred will sit in the trust permanently and these trusts are expensive to create. 

In addition, because it’s an irrevocable trust, you no longer control the assets within. Lastly, implementing the trust at least five years before applying for assistance is necessary. Otherwise, your trust will fall within Medicaid’s five-year look-back rule.

Life Estate

A life estate allows you to jointly own real estate with another person, such as your spouse and transfer sole ownership to them when you die. This asset type can exempt your house from Medicaid eligibility standards. However, like Medicaid trusts, life estates are irrevocable, meaning you transfer control of the assets to your trustee. In addition, planning ahead is necessary because of Medicaid’s five-year look-back law.

Medicaid Annuity

You can also purchase an annuity that follows your state’s Medicaid regulations to shelter your funds. Even if you suddenly need long-term care and haven’t planned for it, you can transfer some of your assets to a relative to activate Medicaid’s look-back period. Then, you can use the rest of your money to obtain a Medicaid annuity that creates sufficient income for your care costs until the penalty period expires. However, annuities can be expensive and some states limit their use.

Bottom Line

how can i protect my ira from medicaid

Protecting your IRA from Medicaid involves knowing your state’s regulations and planning accordingly. For example, you may need to put your IRA into payout status or reduce your monthly distribution. In addition, you could roll your IRA into a Medicaid-exempt asset. Regardless, a thorough, long-term approach is necessary. Working with a financial professional can help ensure your assets won’t go to Medicaid when you need assistance for care.

Tips for Protecting Your IRA from Medicaid

  • A financial advisor can help you create a plan that shelters your nest egg from Medicaid and receive maximum assistance from your state. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • qualified income trust is another option to direct funds away from Medicaid eligibility standards. This asset is beneficial if your income is too high to qualify for Medicaid but too low to afford long-term care on your own.

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