Reporting Your Client’s Rollover: Filing Taxes After Funding a Medicaid Compliant Annuity With an IRA

Alisa Lamal

Disclaimer: With Medicaid, VA, and insurance regulations frequently changing, past blog posts may not be presently accurate or relevant. Please contact our office for information on current planning strategies, tips, and how-to's.

When completing a Medicaid spend-down, one asset that may cause hesitation is how best to spend down the client’s IRA without incurring large tax consequences. In states where an IRA is considered a countable asset for Medicaid purposes, the solution may be converting the existing IRA to a tax-qualified MCA.

Learn More: What Attorneys Need to Know About IRAs and MCAs


Transferring Funds to an IRA-MCA

When transferring an existing IRA to an IRA-MCA, there are two primary methods available to the account holder:


60-Day Rollover

This option requires the account owner to contact the current IRA custodian company and request a complete liquidation of the account without any taxes withheld. Once the check for the liquidation proceeds has been received, the account owner has 60 days to reinvest those proceeds. If the account owner does not reinvest the funds within this timeframe, the funds will become fully taxable.  Only one 60-Day Rollover can be completed per 365 days.


Trustee-to-Trustee Transfer

This type of transfer requires the account holder to initiate the request by completing a few authorization forms. The plan administrator will then contact the IRA custodian company to request the transfer of funds. There is no limit on the number of Trustee-to-Trustee transfers that the account holder can complete in a given year.


How are Payments from an IRA-MCA taxed?

Since traditional IRAs are funded with pre-tax dollars, distributions from the IRA are generally taxable in the year of receipt. When fully liquidating an IRA, the entire account becomes taxable. However, by transferring the IRA to an MCA, the account holder is only taxed on the total payments distributed from the annuity each year. The account holder can stretch the taxation of the IRA liquidation over multiple tax years by structuring the MCA with a multi-year term rather than incur the tax consequences all at once.

Read More: Annuitizing IRAs: Will My Clients Still Meet Their RMDs?


Reporting the Rollover

Transfers completed using a Trustee-to-Trustee transfer are reported directly to the IRS by the plan administrators. Therefore, your client shouldn’t have to do much else come tax season. However, clients who utilize the 60-Day Rollover have some additional considerations they need to keep in mind.

They will receive a 1099-R from the previous IRA custodian.

Form 1099-R is issued by the plan administrator to report:

  • any distribution from the IRA greater than $10
  • the total distribution amount received from the IRA
  • how much of the distribution was taxable and;
  • how much, if any, was withheld for federal and state taxes.

When conducting a 60-Day Rollover, the previous IRA custodian does not have a paper trail of what the client did with the funds once they were distributed. Therefore, the client will receive a 1099-R showing their entire IRA was liquidated, and, therefore, taxable. It is then up to the client to properly report the rollover on their Form 1040 in order to avoid taxation on the account. In short, it is important for the client to understand they will receive a 1099-R, but that it does not mean the 60-Day Rollover was done incorrectly. It simply means they must indicate the rollover amount where required.

The 5498 is not due to the IRS until May 31st.

Clients often request verification from the new IRA custodian confirming the rollover amount to include with their tax filing. This is known as Form 5498, which is completed by the custodian to report:

  • any tax-deductible contributions made to the account that tax year; and
  • any rollovers that might have been made that tax year

However, IRA custodians, by law, are not required to produce a 5498 until May 31st of the following tax year—a month and a half after tax filings are typically due. Once produced, the 5498 is provided to the client and a copy is filed with the IRS. So, the client will receive this confirmation of the rollover amount, as will the IRS, but it will likely not come until after tax filings must be submitted. Your client can and should still report the rollover as instructed on their 1040.

Always work with a tax expert after conducting a rollover.

The most important thing for your client to keep in mind after conducting a Trustee-to-Trustee transfer or a 60-Day Rollover is to work with a tax expert, both before and after proceeding with the transfer. Particularly when it comes to a 60-Day Rollover, clients typically have several questions related to filing the following year’s taxes. In order to ensure they are getting the best advice and reporting the transaction properly to avoid taxation, encourage them to seek guidance from a qualified professional.


When is a Rollover Appropriate in Medicaid Planning?

If your client has a large IRA that is preventing their Medicaid eligibility, using an IRA-MCA can be an excellent option to spend down the funds, accelerate eligibility for benefits, and mitigate the tax consequences associated with the account. For a community spouse with an IRA, the strategy is similar to that of a typical MCA—the excess assets are funded into an annuity owned by and made payable to the community spouse. If an institutionalized spouse owns an IRA, they could utilize a strategy known as the “Name on the Check Rule.”

Learn More: Using IRAs to Fund Medicaid Compliant Annuities


To learn more about Medicaid spend-down strategies for your client’s IRA, schedule a call with one of our Benefits Planners today!


*This information is provided for educational purposes only and is not intended as legal advice.


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