How to Handle Retirement Accounts in Medicaid Planning

Jim Wolverton, J.D.
jar of coins labeled retirement

The landscape of retirement planning has undergone a significant shift in recent decades, transitioning from defined benefit pension plans to retirement accounts primarily funded by individuals or employee contributions. As elder law attorneys encounter an increasing number of these retirement accounts, it’s crucial to understand their nuances and implications for future Medicaid qualification.

Watch Now: What Attorneys Need to Know About IRAs and Medicaid Compliant Annuities

Common Types of Retirement Accounts

Individual Retirement Accounts (IRAs) stand as self-funded retirement accounts sourced from earned income. While early distributions before 59.5 years old incur financial penalties, IRAs offer deferred tax treatment, allowing investments to grow tax-free.

  • Traditional IRAs: Contributions to traditional IRAs are typically deductible from income, reducing reported income and facilitating tax-free growth until distributions are taken. They also have specific rules regarding required minimum distributions after age 73 and provide tax advantages for self-employed individuals.
  • Roth IRAs: Contributions to Roth IRAs are made with previously taxed funds and do not receive income deductions. Distributions remain tax-free, and they lack specific rules governing distributions.

Defined contribution plans enable employees to defer part of their income before taxation as contributions to a retirement plan, often with employer matching. These accounts also impose a financial penalty if funds are withdrawn before the employee turns 59.5 years old.

  • 401(k) Plans: Salary deferred to 401(k) plans is excluded from taxable income, with tax-free growth until distributions occur. They also mandate rules on required minimum distributions after the investor reaches 73 years old.
  • 403(b) Plans: Offered by public schools, colleges, churches, or charities, 403(b) plans resemble 401(k) plans, allowing employees to contribute pre-taxed income, sometimes with employer matching.

Read More: Are IRAs Countable or Exempt for Medicaid?

Medicaid and Retirement Accounts

Medicaid imposes strict income and resource limitations for qualifying for long-term care benefits. As an attorney, understanding whether a retirement account is a countable resource in your state is essential for you to develop the best possible planning strategies for your clients.

For example, if you have a client seeking Medicaid benefits who owns a countable retirement account, they may consider transferring the account into a Medicaid Compliant Annuity. This approach will increase their income and aid in covering care costs. However, you must assess each case individually, considering account countability, tax implications, income, and overall resource allocation.

If you would like to learn more about how retirement accounts can impact Medicaid planning, please join us for Part 2 of our CLE webinar series, Retirement Assets and Medicaid Crisis Planning, on June 11.

Jim Wolverton, J.D.
By Jim Wolverton, J.D. | Director of Legal Education

Jim is responsible for creating, curating, and promoting high-quality content related to the estate planning and elder law industry. He also plays a primary role in designing and maintaining a robust education and content calendar for Attorney Access.

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