How to Spend Down Retirement Accounts for Seniors in Texas

Krause Financial

Disclaimer: Since Medicaid rules and insurance regulations are updated regularly, past blog posts may not present the most accurate or relevant data. Please contact our office for up-to-date information, strategies, and guidance.

When spending down for Medicaid eligibility, retirement accounts can pose a problem. Although IRAs are exempt in some states, they are considered countable assets in other states. In Texas, IRAs were previously considered countable, unless the account was in an annuity, but are now exempt as long as the account owner is taking their required minimum distributions (RMDs). On the other hand, 401(k) accounts are still countable for Medicaid purposes. How can attorneys in Texas help their senior clients who own a 401(k) achieve Medicaid eligibility?

A simple solution is to convert the client’s 401(k) into a tax-deferred annuity, which is exempt for Medicaid purposes in Texas.


What is a Tax-Deferred Annuity?

A deferred annuity is a contract with an insurance carrier that can be funded with either non-qualified or tax-qualified funds and will pay out a regular income, or lump sum, to the owner or payee at a future date. This type of annuity differs from an immediate annuity, which begins making payments immediately. Tax-deferred annuities offer a competitive rate of return through interest earned, and taxation on that interest is deferred until the time of withdrawal.

Attorneys in Texas can utilize tax-deferred annuities with clients who own a 401(k) and are looking to qualify for Medicaid. The annuity does not have to meet the typical requirements of a Medicaid Compliant Annuity (MCA), meaning it does not have to name the state Medicaid agency as beneficiary.


What if the Institutionalized Spouse Owns the Account?

In cases involving a married couple wherein the institutionalized spouse owns a 401(k) or IRA, we can help you transfer the account to a tax-deferred annuity and name the community spouse as payee. That is, the institutionalized spouse would still own the annuity, but any RMD payments would be paid directly to the community spouse. This prevents the nursing home from receiving the RMDs from the institutionalized spouse as part of their Medicaid co-pay, making it a win-win situation for most clients. The retirement account remains intact in the tax-deferred annuity, and the RMDs aren’t lost to the nursing home.

If you have any questions about how to handle retirement accounts for your senior clients in Texas, especially those who are looking to qualify for Medicaid, reach out to our team at Krause Financial.


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