Second to the house, an individual retirement account (“IRA”) is usually the largest asset when looking into someone’s financial portfolio. The tax and Medicaid rules dealing with IRAs are very different yet related, quite complex and often misinterpreted or misapplied. It is important to have a general understanding of these rules in order to avoid paying unnecessary taxes or worse; spending down the value of the IRA towards the cost of your long-term care needs.
Medicaid rules and regulations afford IRAs special protection. The general Medicaid rule is that an IRA will be considered an exempt resource if you are taking your required minimum distribution (“RMD”). An RMD is the minimum amount that you must withdraw from your IRA according to the Internal Revenue Code (“Code”). The RMD is an amount calculated by applying the IRS life expectancy tables published by the IRS, to the prior December 31 balance of your IRA. The Code provides that you must begin taking RMDs no later than April 1 of the calendar year following the year you turn 70 1/2. From a tax perspective, the concept is simple – the IRS wants their tax revenue on your deferred IRA that has been accumulating tax-free your whole life.
Thus, if you are taking your RMD, the entire principal balance of your IRA will be protected if you need to apply for Medicaid. Be mindful, I didn’t say the RMD was protected. While the principal balance of the IRA is protected, the RMD is not. The RMD is treated as income and added to the rest of your income. As you may know, New York requires that you contribute your income to the cost of your care.
I regularly meet with individuals who have been told to spend down their IRA in order to become eligible for Medicaid. Unfortunately, this article is going to sound familiar to many who read it, some may be the persons who have consulted and worked with me. Nursing homes, professionals other than attorneys and non-elder law attorneys and are often the biggest culprits in providing this erroneous information. I once worked with a family who cashed out an IRA having more than a $300,000 balance because they were told to do so by a nursing home.
The Medicaid rules are very stringent. Not only must the applicant be receiving her RMD, but the RMD also must be taken on a monthly basis. One of the first things we usually do with clients is have them contact their financial advisors to change their RMD distribution from annually to monthly, if they have not already taken the RMD.
Another stringent and relatively unknown rule is that an IRA will lose its exempt status if the applicant takes out more than the RMD. This is usually an issue in homecare situations. For instance, an applicant may be at home in need of Medicaid to cover the cost of caregivers. Her only asset is a small checking account and an IRA. Unfortunately, in our geographic area, the process of applying for Medicaid to cover the cost of homecare services can take a few months. If the applicant depletes her checking account, she cannot take a distribution from her IRA as it will expose the entire balance and render her ineligible for Medicaid until further planning is done. This is a rule that families have a difficult time digesting. Often, other family members pitch in to cover the cost of care until Medicaid is approved.
As you can see, these rules have many subtleties and illustrates the importance of working with an elder law attorney. Medicaid planning and tax planning is not a “do-it-yourself” project.