Thank you to our guest blogger Thomas Krause, of Krause Financial Services, for leading this conversation on dealing with retirement accounts in crisis planning.
When dealing with crisis planning for Medicaid or VA, one of the trickiest assets to handle is an IRA. In select states, IRAs are considered exempt assets. In a few others, IRAs of the community spouse are considered exempt assets. However, in most states, IRAs belonging to either spouse are countable assets for Medicaid purposes, and they must be spent-down. Additionally, in VA planning, IRAs count toward a claimant’s net worth.
So, how should one handle a client’s retirement account?
Rather than liquidate the account and incur large tax consequences, your client should consider investing the IRA funds into a Medicaid Compliant Annuity (MCA) or a VA Annuity as part of their spend-down plan for eligibility. The transfer of the funds is not a taxable event, and the funds are taxed as payments are made within each calendar year.
When choosing a term for the annuity, utilizing a longer term is typically recommended. The longer the annuity is structured, the more spread out the tax consequences are, and the greater the economic benefit will be for the client. Should the client need to spend-down both non-qualified (checking account, savings, etc.) and tax-qualified assets, they can purchase two annuities. Non-qualified and tax-qualified accounts cannot be mixed; therefore, they cannot be funded into the same contract.
Preferential Treatment by the DRA
Some may be weary of using MCAs due to their restrictive provisions, however the Deficit Reduction Act of 2005 (DRA) provides preferential treatment to annuities funded with retirement accounts. In most states, a tax-qualified immediate annuity is not required to be irrevocable, non-assignable, provide equal monthly payments, or be actuarially sound. However, it does usually need to designate the state Medicaid agency as a beneficiary, though certain states do have exceptions to this. Annuities funded with retirement accounts are non-assignable and irrevocable by nature, however the client may be able to take advantage of an annuity term longer than their Medicaid life expectancy or structure the annuity with payments other than equal (balloon-style) and monthly (quarterly, annually, etc.).
Transferring the Funds
If your client resides in a state where their IRA is countable, and they do not want to liquidate the account, they have three options to fund the account to an annuity: a trustee-to-trustee transfer, a direct rollover, or a 60-day rollover.
- A trustee-to-trustee transfer consists of a direct plan-administrator to plan-administrator transfer. The client fills out an authorization form for the transfer, and the insurance company issuing the annuity obtains the funds directly from the custodian company. The IRS does not limit the number of times an individual can transfer his or her IRA.
- A direct rollover consists of the applicant requesting that the current custodian company make the payment directly to the insurance company issuing the annuity. Note some custodians will not issue a check payable to another custodian without transfer paperwork.
- A 60-day rollover consists of the applicant contacting the company holding the tax-qualified funds and initiating a complete liquidation of the account, without withholding any taxes. As long as the funds are reinvested into the tax-qualified annuity within 60 days, immediate tax consequences would usually be avoided. The IRS limits the number of times an individual can rollover his or her IRA to once each fiscal year.
This article was reprinted with the permission of ElderLawAnswers.com. If you have any questions regarding the material in this article and how it applies to you, please contact Pearson Bollman Law at 515-727-0986.