Can an IRA affect Medicaid Eligibility?

For many Medicaid applicants, individual retirement accounts (IRAs) are one of their biggest assets. If you do not plan properly, IRAs can count as an available asset and affect Medicaid eligibility.

As we know, Medicaid applicants can have only have a small amount of assets in order to be eligible to receive benefits ($2,000). Certain assets — i.e., a house, car, and burial plot — are exempt from eligibility determinations. Whether your IRA counts as an exempt asset depends on whether it is in “payout status” or not.

At age 70 ½, individuals must begin taking required minimum distributions from their IRAs, which means the IRA is in payout status.  If an IRA is in payout status, it may not count as an available asset for the purposes of Medicaid eligibility, but the payments you receive will count as income. Medicaid recipients are allowed to keep a tiny amount of income for personal use and the rest will go to the nursing home.

If the IRA is not in payout status, the IRA is a non-exempt asset, which means the total amount in the IRA will be counted as an asset, affecting your Medicaid eligibility. In order to qualify for Medicaid, you will need to cash out your IRA and spend down the assets. Alternatively, you could transfer the money to your spouse or someone else, although there will likely be an income tax penalty for doing this.

The rules for a 401(k) are similar to an IRA. If the 401(k) is not in payout status, Medicaid may count as an asset any funds you are eligible to withdraw from the 401(k)–even if you have to pay a tax penalty to withdraw the funds.

Note that the rules for a Roth IRA may be different. If you have a Roth IRA, it may not be exempt at all because Roth IRAs do not require minimum distributions.