How to Protect an Individual Retirement Account / Arrangement (IRA) When Applying for Medicaid

Summary
Many seniors who need Medicaid Long Term Care also have IRAs, but those IRAs can make some of those seniors or their spouses financially ineligible for Medicaid. However, where they live, their marital status and the IRA’s payout status all make a difference. Plus, there are ways to be Medicaid eligible with an IRA.

The Importance of Medicaid’s Asset and Income Limits

To qualify for Medicaid, applicants need to meet two financial requirements – the asset limit and the income limit. Depending on your circumstances and location, IRAs can count against both limits, but they can also be exempt, or not count against the limits. That also applies to 401(k)s, 403(b)s, Keoghs and TSAs, as do the rest of Medicaid’s IRA rules.

These asset and income limits vary by the three types of Medicaid – Nursing Home Medicaid, Home and Community Based Service Waivers and Aged, Blind, and Disabled / Regular Medicaid. Nursing Home Medicaid provides long term care in approved nursing homes. Home and Community Based Service Waivers and Aged, Blind, and Disabled Medicaid offers long term care services and supports for Medicaid beneficiaries who live in their own or the home of a loved one, or in some cases assisted living residences, adult foster care and other residential settings.

Medicaid’s asset and income limits also vary by state. However, even though there are many possible variations, the asset and incomes limits are low. Most states allow single applicants to have a maximum of $2,000 in assets and couples to have $3,000 or $4,000. New York allows individuals to have $16,800 in assets and couples to have $24,600 (in 2022), but those are by far the largest totals.

As for income, it varies between $2,500 / month and $850 / month, again depending on type of Medicaid, state of residence and marital status. But all Nursing Home Medicaid beneficiaries are required to give most of that income to the state to help offset the cost of care, and some Waiver beneficiaries are required to do the same to offset assisted living expenses.

What is Counted as an Asset?

For Medicaid purposes, assets that count against the limit include bank accounts, stocks, bonds, certificates of deposit, cash and any other assets that can be easily converted to cash. An applicant’s home can be exempt from the asset limit if their spouse, minor child or blind or disabled child of any age lives there. The home is also exempt if the applicant lives there, or files an “intent to return” home, and their home equity interest is below the state limit. Home equity interest is the portion of the home’s equity value that the applicant owns, and the home’s equity value is the current value of the home minus any outstanding mortgage or other debt against the home. Home equity interest limits range from $636,000 to $955,000 depending on the state.

An IRA can also count toward Medicaid’s asset limit depending on its payout status and type, and the applicant’s state of residence and marital status. However, even when an applicant has an IRA that is a countable asset, there are strategies (discussed below) to help them become Medicaid eligible.

How Different States Consider IRAs for Medicaid Eligibility Purposes

All 50 states and Washington, D.C., can be put into five categories when it comes to how they treat IRAs in terms of Medicaid eligibility.

1) States (3 total) where IRAs for applicants and their non-applicant spouses are exempt regardless of payout status – Kentucky, North Dakota and Washington, D.C.

Medicaid applicants who live in these places do not need to worry about their IRAs, or their spouse’s, counting against Medicaid’s asset limit under any circumstances. However, if their IRA is in payout status, the payout amount will count against the Medicaid income limit.

An IRA goes into payout status as soon as the owner starts withdrawing funds from it. IRA owners who are age 72 or older must withdraw a Required Minimum Distribution (RMD) from their IRAs on a monthly basis. The RMD is based on IRA life expectancy charts. The RMD monthly total, or however much the Medicaid applicant is withdrawing from their IRA every month, is counted against the Medicaid income limit along with all other income. Almost all income is counted (pension payments, Social Security benefits, property income, alimony, wages, salary, stock dividends, etc.) other than COVID-19 stimulus checks and Holocaust restitution payments.

2) States (7) where IRAs for applicants and their non-applicant spouses are exempt as long as they are in payout status – Florida, Mississippi, New York, Ohio, Rhode Island, South Carolina, Vermont.

Again, it’s important to note that even though IRAs in these seven states will not count against the asset limit if they are in payout status, the payout amounts will count against the income limit.

Ohio residents should also be aware that some Ohio counties do count IRAs as Medicaid assets regardless of payout status.

3) States (3) where the applicant’s IRAs are exempt if it is in payout status and their non-applicant spouse’s IRAs are exempt regardless of payout status – California, Georgia, Idaho.

4) States (8) where the applicant’s IRAs are countable regardless of payout status, but their non-applicant spouse’s IRAs are exempt regardless of payout status – Alaska, Delaware, Indiana, Kansas, Pennsylvania, West Virginia, Wisconsin, Wyoming.

5) States (30) where the applicant IRA and the non-applicant spouse IRA count regardless of payout status – Alabama, Arizona, Arkansas, Colorado, Connecticut, Hawai’i, Illinois, Iowa, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, Oklahoma, Oregon, South Dakota, Tennessee, Texas, Utah, Virginia, Washington.

Ways to Become Eligibile with an IRA

Even if you or your spouse has an IRA that can be counted and would put you over Medicaid’s asset or income limit, there are still ways to become Medicaid eligible.

Spend Down

Countable IRAs can be liquidated, or cashed out, and spent on items that are exempt from the asset limit. This is known as “spending down.” Exempt items include home modifications that promote independent living, like wheelchair ramps, stair lifts and walk-in tubs. A new, modified vehicle can also be exempt, as are pre-paid funeral plans and life insurance policies (up to certain limits). Cashed out IRAs may also be spent on long term care (such as in-home personal care, assisted living or nursing home care) to help applicants get below Medicaid’s asset limit.

Any item purchased with funds from a cashed out IRA that is not Medicaid exempt will count against the asset limit.

Applicants should also note they are not allowed to give away assets, including funds from a cashed out IRA, in order to get under the asset limit. This violates Medicaid’s “look-back rule”, which looks back into an applicant’s financial history to make sure they have not given away assets or sold them at less than fair market value. Most states look back five years, although California only looks back 2.5 years and is in the process of completely removing the look-back rule.

Allocation to Spouse

If just one spouse in a married couple is applying for Medicaid, there are spousal impoverishment rules in place to make sure low-income, non-applicant spouses do not live in poverty. The Minimum Monthly Needs Allowance allows a Medicaid applicant to give a portion of their monthly income to their non-applicant spouse. And the Community Spouse Resource Allowance allows the non-applicant spouse to keep a larger percentage of the couple’s assets.

Annuities

An annuity is a financial product that converts a lump sum of cash into monthly payments. Some annuities are not counted as Medicaid assets in some states. So, cashing out an IRA that is counted against the asset limit and buying an annuity that is not counted could help an applicant become Medicaid eligible. Once again it’s important to remember that even though the annuity won’t count against the asset limit, the monthly payments from the annuity will count against Medicaid’s income limit.

Types of IRAs and Other Retirement Savings Plans

Roth IRAs never require their owners to withdraw funds, even when the owner turns 72 and would have to take a Required Minimum Distribution (RMD) from other IRAs. This means that unless the state automatically exempts IRAs regardless of payout status, Roth IRAs will most likely be considered an asset. IRAs are automatically exempt for non-applicant spouses in Alaska, Delaware, Indiana, Kansas, Kentucky, North Dakota, Pennsylvania, West Virginia, Wisconsin, Wyoming and Washington, D.C., and they are automatically exempt for applicants in Kentucky, North Dakota and Washington, D.C.

IRAs that can be easily cashed out may be counted under some circumstances where other, more traditional IRAs would be exempt.

As noted above, these guidelines on how Medicaid treats IRAs can also be applied to 401(k)s, 403(b)s, Keoghs and TSAs.