The Listen to Lawrence Letter: Can Medicaid force you to withdraw from your retirement account?
July 13, 2021
Dear Clients and Friends,
When dealing with an IRA, the Medicaid and IRS rules sometimes are different, and sometimes an exception may apply… as pointed out in today’s letter. Read on for the question and answer that will clear it all up…I hope! 😊
CLIENT QUESTION:
Can Medicaid force someone to start taking withdrawals from their IRA if they are either under 59½ or even under 72? The former would subject them to a 10% early withdrawal penalty (unless there’s an exception I would have to look up due to disability) and they are not otherwise required to start RMDs until age 72 now.
MY RESPONSE:
To be eligible for Medicaid, you have to be poor, that is you can have no more than $15,900 in your name. However, there is a way to exclude the value of a retirement plan (IRAs, Roth IRAs, 403Bs, 401Ks, and the like) by putting the plan into “pay status.” This means you must take out a certain amount each year based upon your life expectancy, as provided by Medicaid’s own tables (at least in Nassau and Suffolk Counties), not the RMDs as provided by the IRS. This amount that you must take out will be greater than the IRS’s RMDs.
So what does this all mean? Essentially, if you want Medicaid to exempt your retirement plans, you must take out this amount, even if you are under 72…and even if you are under 59 ½. Just as a refresher, these two ages are important in the retirement plan world. 72 is the age when you MUST start taking out RMDs. 59 ½ is the age when the IRS says you MAY start taking out RMDs without a 10% penalty.
So the real question here is whether you can take out enough money from your retirement plan each year in order to exempt your retirement plan from Medicaid, without penalty, PRIOR to the age of 59 ½?
The answer is YES!
The law provides that you can get a doctor’s statement to qualify for an exception to the early withdrawal penalty IF YOU ARE DISABLED. The IRS considers you to be disabled if you can’t perform any substantial gainful activity due to a mental or physical condition. A physician must attest that your condition is likely to be prolonged, or even result in death.
I hope this helps! Please forward this information to your friends and relatives to share these informative answers to some very commonly asked questions.
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Stay safe!
Until next time…
peace, health and happiness,
Lawrence Eric Davidow