While it is theoretically possible to put an individual IRA or 401(k) into a Medicaid Asset Protection Trust (MAPT), it is not generally suggested as a Medicaid planning strategy.
This is because in order to transfer a retirement savings account into a MAPT, it must be cashed out, which can cause serious tax consequences. With traditional IRAs and 401(k)’s, contributions are tax deferred, which means the contributions are made with pre-taxed income. Furthermore, taxes are not paid on the growth of the investments as long as money is not withdrawn from the account. However, when the money is withdrawn, taxes will be paid on the initial investments, as well as the growth. It is important to mention that cashing out the entirety of a retirement account can also push one into a higher tax bracket. Furthermore, if money is withdrawn from the retirement account before the owner reaches 59½ years old, there is a 10% penalty fee.
Let’s back up; A Medicaid Asset Protection Trust is used to protect countable assets from both Medicaid’s asset limit and Medicaid’s estate recovery program, preserving them as inheritance for loved ones. To be Medicaid-compliant, the trust must be irrevocable, which means that the terms of the contract cannot be changed or cancelled. With this type of trust, the trustmaker is no longer considered to be the owner of the assets. Essentially, the trustmaker (grantor) names a trustee, who manages the assets in the trust, and upon the death of the trustmaker, the assets go to the named beneficiaries.
While assets in a MAPT are protected from Medicaid, there is one caveat. Creating such a trust violates Medicaid’s 60-month look back period (30-months in California), a timeframe in which Medicaid considers all past transfers immediately preceding one’s Medicaid application date. If assets have been given away or sold for less than fair market value, the penalty will be a period of Medicaid ineligibility. Since the transfer of assets into a MAPT violates the Medicaid look back rule, it is imperative that the trust be created at a minimum, 60-months (30-months in California), prior to one applying for long-term care Medicaid.
So, back to an individual’s IRA or 401(k); Another issue with putting the funds into a MAPT is that the retirement account needs to be cashed out and transferred to a MAPT well before the need for Medicaid becomes apparent.
It is important to mention that in some states, a Medicaid applicant’s 401(k) or IRA may not be counted towards Medicaid’s asset limit. Generally speaking, if a state allows a retirement account to be exempt, it must be in payout status. (To see which states allow for this exemption, click here). However, the payments would count as income towards Medicaid’s income limit, which in some cases, could cause a Medicaid applicant to be over the limit. (As of 2020, long-term care Medicaid generally has a monthly income limit of $2,349 / month. However, this limit does vary by state. For state-specific eligibility, click here.)
While a MAPT is not a good option to protect one’s retirement account from Medicaid, there are other planning strategies that can be implemented. A professional Medicaid planner can assist one is considering all of his / her options. Learn more about retirement accounts and Medicaid.