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HOW CAN I PROTECT MY IRA FROM MEDICAID?

Updated on December 29, 2023
Written by Ashley Kilroy

Edited by Jeff White, CEPF®

Share

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
ExemptionAlabamaCountableN/ACountableN/AAlaskaCountableN/AExemptNoArizonaCountableN/ACountableN/AArkansasCountableN/ACountableN/ACaliforniaExemptYesExemptNoColoradoCountableN/ACountableN/AConnecticutCountableN/ACountableN/ADelawareCountableN/AExemptNoDistrict
of
ColumbiaExemptNoExemptNoFloridaExemptYesExemptYesGeorgiaExemptYesExemptNoHawaiiCountableN/ACountableN/AIdahoExemptYesExemptNoIllinoisCountableN/ACountableN/AIndianaCountableN/AExemptNoIowaCountableN/ACountableN/AKansasCountableN/AExemptNoKentuckyExemptNoExemptNoLouisianaCountableN/ACountableN/AMaineCountableN/ACountableN/AMarylandCountableN/ACountableN/AMassachusettsCountableN/ACountableN/AMichiganCountableN/ACountableN/AMinnesotaCountableN/ACountableN/AMississippiExemptYesExemptYesMissouriCountableN/ACountableN/AMontanaCountableN/ACountableN/ANebraskaCountableN/ACountableN/ANevadaCountableN/ACountableN/ANew
HampshireCountableN/ACountableN/ANew JerseyCountableN/ACountableN/ANew
MexicoCountableN/ACountableN/ANew YorkExemptYesExemptYesNorth
CarolinaCountableN/ACountableN/ANorth
DakotaExemptNoExemptNoOhioExemptYesExemptYesOklahomaCountableN/ACountableN/AOregonCountableN/ACountableN/APennsylvaniaCountableN/AExemptNoRhode
IslandExemptYesExemptYesSouth CarolinaExemptYesExemptYesSouth
DakotaCountableN/ACountableN/ATennesseeCountableN/ACountableN/ATexasExemptYesExemptYesUtahCountableN/AExemptN/AVermontExemptYesExemptYesVirginiaCountableN/ACountableN/AWashingtonCountableN/ACountableN/AWest
VirginiaCountableN/AExemptNoWisconsinCountableN/AExemptNoWyomingCountableN/AExemptNo


IMPORTANCE OF MEDICAID’S ASSET LIMIT



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



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.
 * A 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.

Photo credit: ©iStock.com/AlexanderFord, ©iStock.com/designer491,
©iStock.com/ljubaphoto

Ashley KilroyAshley Kilroy is an experienced financial writer currently serving
as an investment and insurance expert at SmartAsset. In addition to being a
contributing writer at SmartAsset, she writes for solo entrepreneurs as well as
for Fortune 500 companies. Ashley is a finance graduate of the University of
Cincinnati. When she isn’t helping people understand their finances, you may
find Ashley cage diving with great whites or on safari in South Africa.
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