401(k)/IRA and medicaid
If someone is faced with the possibility of going to the nursing home, is there any advantage to having a 401(k) vs an IRA when it comes to qualifying for medicaid?…and, does anyone have a brief overview of the spend down rules.
Permalink Submitted by Alan Spross on Mon, 2011-01-31 23:11
Short answer- No.
ERISA protection for 401k accounts and state or federal BK protection might mean that these retirement accounts cannot be attached for pre Medicaid medical or non medical debts and that these accounts would be the last to survive for a pre Medicaid taxpayer. IRS liens and marital settlements are exceptions to the above.
But Medicaid is different in that it is a benefit that must be applied for. All assets including retirement plans must be disclosed on the application as well as amounts that have been gifted or transferred to trusts in the prior 5 years. If these assets exceed the Medicaid allowance, the application is denied and further spend down is required. That would include these retirement accounts having to be tapped for the Medical/long term care expenses, the gifted amounts restored by the donees, and/or the allowed amounts having to be spent down until the applicant would be able to apply again for Medicaid. For example, the applicant might sell the house to forestall application for Medicaid. When the application is approved perodic income such as social security or pensions must be assigned for the on going expenses.
Therefore, since these retirement accounts are not “allowed” amounts to qualify, they are essentially forced to be spent. Allowable amounts include the applicant’s primary home, one car, around 2,500 in other asets and an amount for the spouse that I think is around 100k if the spouse does not have their own assets.
There may be some variations from state to state since Medicaid is a federal-state financed program, and the comments above are generalizations in some cases. And given the federal deficit situation and the even more serious state deficits in various states, you can expect further restrictions down the road.
Income taxes on the pre tax amounts in these plans can typically be eliminated or almost eliminated by the medical deduction in many cases since nursing home expenses are fully deductible except for the 7.5% of AGI floor.