Funding a Medicaid Compliant Annuity with IRA/Tax-Qualified Funds
Did you know your clients may use IRA/pre-tax/retirement assets to fund a Medicaid Compliant Annuity (MCA)? If you reside in a state that considers an IRA or retirement account to be a countable asset for Medicaid Planning purposes, your clients may benefit from transferring or rolling over their retirement accounts into an IRA MCA. The advantage of using pre-tax/retirement assets to fund a MCA (instead of simply liquidating the account and paying all the taxes in one year) is spreading out the tax consequences over several tax years. For example, if an IRA MCA is established in February 2020 and the annuity payout period is structured for 2 years with the first payment starting in March 2020, we’re able to spread out the tax consequences over 3 tax years – client will receive payments from the annuity in 2020, 2021, and 2022.
What is the process to move retirement accounts into an IRA MCA? When funding a MCA with IRA/pre-tax/retirement assets, the applicant has two options:
An IRA Transfer: With an IRA Transfer, the IRA funds are moved directly from one retirement account/IRA custodian to the MCA insurance company— the IRA owner doesn’t see the money at all— and this transaction is not reported to the IRS. The IRA owner can transfer their retirement account as many times as they want in any time frame they want— there are no limits or restrictions on these transfers between IRAs and providers. The transfer is accomplished by submitting transfer paperwork with the MCA application which will allow for the MCA company to obtain the monies directly from the current IRA custodian. An IRA transfer may take a couple weeks to several weeks to complete, depending on the current IRA custodian. The timeframe of the transfer will delay Medicaid eligibility until the money is actually moved to the MCA company.
A 60-Day Rollover: A 60-Day Rollover occurs when the IRA owner personally takes possession of the funds before putting them back into an IRA within the 60-day window. The IRA owner will request a liquidation check from the current IRA custodian without withholding taxes and reinvest the funds within 60 days. The IRA distribution check will be payable to the IRA owner. The check may then be endorsed over to the company issuing the MCA. The IRA owner must deposit this money back into the IRA MCA within 60 days to prevent the IRS from taxing these funds. Caution: The IRS only allows one rollover in a 12-month period. This applies to all individual retirement accounts — the IRA owner is only allowed one rollover, no matter how many accounts the applicant has.
With this in mind, if the IRA owner has several IRA accounts they are interested in using to fund an IRA MCA, we would need to use an IRA transfer for all but one account.
When it comes to planning to achieve Medicaid eligibility, time is of the essence. With a 60-day rollover being quicker than a transfer, most clients choose to proceed with a rollover because this process is typically completed within 5 to 7 days whereas a transfer can take several weeks to complete. As mentioned above, if the client has several retirement accounts they’d like to use to fund the MCA, we’ll be forced to use a transfer in that the IRS only allows for one rollover per 12-month period.
If you have specific questions related to the options available to your clients with retirement accounts, reach out to us today!