IRA to MCA: How to Fund a Medicaid Compliant Annuity with a Tax-Qualified Account

While some states consider an IRA to be exempt resource, in most states this type of asset is countable and must be spent down. This may leave clients facing the complicated question of how to best spend down their retirement accounts. If the client chooses to liquidate the retirement account, they may incur sizeable tax consequences. Yet, without eliminating this countable asset, the client’s resources will exceed the limitations to qualify for Medicaid. Utilizing a Medicaid Compliant Annuity can help protect their tax-qualified accounts by preventing immediate taxation of liquidating the account and accelerating their eligibility for Medicaid.

What is a Medicaid Compliant Annuity?

A Medicaid Compliant Annuity (MCA) is a crisis spend-down tool that can help senior clients accelerate their eligibility for Medicaid benefits. The MCA is a Single Premium Immediate Annuity (SPIA) that is structured to adhere to the federal requirements of the Deficit Reduction Act of 2005. By converting their excess countable assets into an income stream, applicants can effectively eliminate assets for Medicaid purposes resulting in their ability to qualify for benefits sooner.

Funding an MCA with Tax-Qualified Funds

One way to avoid the tax consequences of liquidating an IRA is to transfer the funds held in the IRA to a tax-qualified Medicaid Compliant Annuity. The initial transfer to the MCA does not trigger a taxable event for the account owner if the ownership of the accounts remains the same. Instead, they are only taxed on the total distribution payments from the annuity they receive that year. This will allow the account owner to stretch the taxation of the IRA over multiple tax years rather than be assessed all at once.

When funding an MCA with a tax-qualified account, the account owner can do so using either a 60-Day Rollover or a Trustee-to-Trustee Transfer.

60-Day Rollover:

This transfer option is typically more efficient and allows the account owner to maintain more control over the transfer. To complete a 60-Day Rollover, the account owner would contact the IRA custodian company and request a complete liquidation of the account without any taxes withheld. Usually, the account owner can expect to receive the liquidation check within five to seven business days. Once received, the funds will need to be reinvested into a tax-qualified MCA within 60 days to avoid any immediate tax consequences. According to federal regulations, an account owner is limited to only one 60-Day Rollover per 365 days.

Trustee-to-Trustee Transfer:

In contrast, the Trustee-to-Trustee Transfer option is primarily facilitated by the custodian company. This transfer option may take four to six weeks to complete and takes place directly between the plan administrator of the IRA and the insurance company establishing the MCA. To utilize this option, the account owner would complete additional authorization paperwork for the transfer when submitting the MCA application. The insurance company issuing the MCA would then request the funds directly from the custodian company of the IRA. There is no limit to the number of Trustee-to-Trustee transfers that an account owner can complete in a 365-day period.

Medicaid Planning with Traditional IRAs

Using an MCA to protect your client’s IRA can help them avoid large tax consequences and prevent them from entering a higher income tax bracket. By transferring a traditional IRA to an MCA, the account owner can spread the tax consequences of liquidating the IRA over the entire annuity term. As such, the account owner can benefit from structuring the annuity with a longer term to provide a greater economic benefit.

If you have questions about how your client could benefit from using an MCA to spend down their tax-qualified accounts, schedule a Discovery Call with an advisor today!

Post provided by Krause Financial Services.

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