We Americans are living longer and more of us are eventually going to need long-term nursing home care. The cost 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. However, it is intended to help low-income and low-wealth individuals, and 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.
Your 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, so rules for Medicaid vary significantly by state. Planning 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 will point out general ideas you to consider.
To receive Medicaid benefits, an individual can own only a small amount of assets – usually 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 Required Minimum Distributions (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 IRA 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. This requires thinking ahead – because the state will ‘claw back’ assets within that 5 year window, if it looks as though you’re trying to ‘hide them’ from being spent.
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 needs 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. First, this is a conversation you need to have with your family. Buying long-term care insurance moves the risk off your balance sheet and may be a good option. It can preserve assets and help your family deal with the obligation of your care. 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.
An important consideration: 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.
The important take away: sit down and discuss what you’d like to have happen for your care…. with an advisor and your family. If you have substantial assets, protecting them requires proper planning, including a consult with a Medicaid law expert. This is not a do-it-yourself project.
Information derived from IRAHelp by Jim Glass JD.