The Weird Rule - NY Medicaid And IRA

Is it ever beneficial to take all the money out of your IRA and pay the taxes on it?  Surprisingly, sometimes the answer can be ‘yes.’

Normally people want to leave money in their retirement accounts as long as possible since the money continues to grow tax-deferred until it is withdrawn.  But in New York, Medicaid can turn that equation on its head.  Here’s why.

If you are receiving Medicaid and are in a nursing home, all of your income is required to be paid to the nursing home.  That includes the Required Minimum Distributions (RMDs) from your IRA.  Your IRA does not affect your Medicaid eligibility and you don’t have to spend it down – as long as you are taking the RMDs each year and paying that money to the nursing home.

BUT – For Medicaid’s purposes, the Required Minimum Distribution is different, depending on whether you live inside or outside of New York City.  Crazy, but true.

IN New York City, the Medicaid RMD is the same as the one that is required by the IRS, using IRS tables for life expectancy.  At 90, the IRS assesses you (whether a man or a woman) a life expectancy of 11.8 years.  You’re practically Father Time!  Your Required Minimum Distribution is the value of your IRA, divided by your life expectancy.  So the RMD would be about one-twelfth, or 8.5%, of the value of your IRA, and all of that would go to the nursing home.

But OUTSIDE of NYC, if you are receiving Medicaid benefits, you are required to follow the much less generous Social Security Life Expectancy Tables when calculating your Required Minimum Distribution for Medicaid purposes.  That table only gives you a life expectancy of 4.03 years as a man, and 4.76 years as a woman.  If you are a man, the RMD in this situation – again, completely payable to the nursing home, would be about one-fourth, or 25%, of the value of your IRA.

How does that affect you?  Let’s look at an example.  I’ve included a graph at the end of the article to illustrate.

An 85-year-old man enters a nursing home.  He is fortunate enough to have $400,000 in his IRA.  If he lives in New York City, his RMD that year will be $27,027.  The graph shows that it is highly unlikely that it will ever be better for him to withdraw the principal from the IRA.  His best bet is to take his RMDs and give them to the nursing home.  The value of the IRA will drop, but relatively slowly.

If he lives in Westchester County, however, in his first year at the nursing home he will be required to withdraw $68,143 and give it to the nursing home.  If he dies at the end of his 91st year, he will have a remaining balance in his IRA of only $95,395 (and his heirs would pay taxes on that as it is withdrawn).

If instead our nursing home resident withdraws all the money from his IRA when he enters the nursing home, pays taxes at 30%, protects 45% of the balance with a Private Annuity, and the remainder grows at 4% per year, by the end of his 91st year, his balance (on which he has already paid taxes) will be $152,870.  If he lives outside of New York City, he (or actually, his heirs) would have saved well over $57,000.

What you can see from the graph is that in the first several years, the portion that he protected via a Private Annuity is smaller, so it takes more time for it to grow.  As the protected money keeps growing, and on the other side, the RMD withdrawals increase dramatically, the value of keeping the money in the IRA drops precipitously.

So the answer to the question, “Would it make sense to take money out of an IRA before entering a nursing home?” is, as is so often the case, “It depends.”  If the person needing nursing home care lives a long time, the answer can be a resounding “yes.”  But if he or she dies within a few years, the taxes the person paid, and the amount that was not able to be saved via a private annuity, will not have been made up for by the passage of time.

Many factors – your age, financial situation, health, your IRA’s value – have an impact on the decision regarding what to do with a retirement account.  Chance is also a factor.  Nobody can predict with certainty how long someone will live.  The best you can do is to make the decision that is most likely to lead to a better outcome for your particular situation.

Knowing how to deal with situations such as this illustrates why it is so valuable to find a highly experienced Elder Law attorney to advise you.