Q: We had a lady attorney speak before our Women's Club about elder law issues. She said that one spouse could qualify for Medicaid if the couple purchased an annuity payable to the one not seeking Medicaid. My husband says she is wrong because the rules were changed earlier this year (another lady attorney had talked before his service group). Is it possible that my husband could be correct (we have a bet riding on this)?
A: To qualify for Medicaid, an applicant must meet both an asset test (the couple has less than $80,760) and an income test. An annuity was not considered part of the couple's $80,760 asset total even if the couple's assets were used to purchase the annuity to downsize their assets to the $80,760 level and thus qualify. The proceeds of the annuity would not be part of the income test as long as the proceeds were paid to the non-medicaid spouse. Thus, some advisers pushed the purchase of an annuity as a way to qualify for Medicaid and yet keep the benefit of all of the assets.
For all annuities purchased after April 1, 1998, the annuity is still not counted against the asset total of $80,760 for the couple but now the amount of the annuity payments is added to the income stream of the non-medicaid spouse and if the amount, including social security payments, exceeds $1357 a month, both a disqualification period is triggered and a penalty is imposed on the excess. Both the disqualification and the penalty are fairly complicated to explain, but the bottom line is that the excess above $1357 is taken.
Some elder law attorneys feel that the move to count the annuity proceeds is illegal because Colorado regulators do not have authority to deal with annuities this way, while many elder law attorneys have traditionally refused to recommend the use of annuities to qualify for Medicaid because the April change in the law was obviously coming.
Thus technically, your husband is more correct than you are. The annuity proceeds are included in determining if the income test has been exceeded. If it has, then the excess is lost and the advantage of using the annuity is also lost.
Q: It made sense for me to convert all of my qualified retirement funds into a Roth IRA and pay the tax (although I can spread the payments over four years). What is this about the proceeds now being taxed again when I withdraw them from the Roth?
A: The Roth IRAs started out so simple but my oh my have the rules started to get complicated! If you elect to withdraw some of the Roth proceeds before you have paid the rollover taxes, even if you otherwise qualify under the other Roth IRA withdrawal rules, there is an additional 10% penalty unless the money is withdrawn as a result of death, disability, or as lifetime annuity. Money that is contributed directly into the Roth and is not rolled over from other retirement accounts can be withdrawn any time if the account is more than five years old, the individual is over 59-1/2, $10,000 is to be used to buy a first home, or for any of the reasons previously mentioned. If both contributed and rollover money are present, contributed money is deemed withdrawn first even if the actual proceeds are traceable to rollover money. But once rollover money is deemed withdrawn, then expect to pay a penalty.