You Can do THAT with an IRA?!?

Sept. 5, 2012 - PRLog -- In some states an IRA is an exempt resource for the community spouse, or even both the community spouse and his or her institutionalized counterpart.  For the states where the IRA is a countable resource, where does that leave it in your crisis Medicaid plan?

An IRA can easily be converted into a tax-qualified Medicaid Compliant Annuity.  About one in five elder law attorneys I make this recommendation to say "I had no idea you could do that!!" Most had previously instructed their clients to simply liquidate the accounts, and proceed in a normal spend-down manner.  When an IRA is to be converted into a Medicaid Compliant Annuity, the owner has two options: (1) a direct transfer or (2) a 60-day rollover.

The direct transfer, which is also known as a "plan administrator to plan administrator transfer," takes place when the owner completes an authorization form and provides it to the new annuity issuing company.  The annuity company uses the authorization form to obtain the IRA directly from the custodian company so the funds never touch the account owners' hands.  The IRS does not limit the number of times an individual can "transfer" his or her IRA.

The 60-day rollover takes place when the owner requests a complete liquidation of his or her IRA without withholding taxes and takes control of the actual funds.  Within 60 days of receipt the owner needs to fund the new annuity contract.  For the tax year in question the owner will receive a 1099-R which will report the entire amount taken as a taxable event.  The total amount goes on line 15a of his or her 1040.  If he or she rolled over the entire account, then line 15b of his or her 1040 should reflect $0.00.  The IRS does limit the number of times an individual can "rollover" his or her IRA to one each fiscal year.

Whether using the direct transfer or the 60-day rollover neither is a taxable event.  As far as timing is concerned, the 60-day rollover is typically completed in less than a week whereas the direct transfer can take months.  Thus, the 60-day rollover technique is more commonly used in crisis Medicaid planning in that timing is of the essence.