Tax on a liquidating distribution
The potential benefit to cashing out and paying the income tax penalty is that the proceeds can be sheltered whereas most of the income generated by the RMD option will likely have to go to pay the patient responsibility portion of the nursing home bill.If the person qualifying for Medicaid is expected to live a long time, liquidating the retirement account is likely preferable because the sheltered money can be used to improve their quality of life (Medicaid doesn’t pay for everything).No one likes paying more taxes then they need to, but the savings realized when Medicaid pays for a huge portion of expensive long-term care costs usually makes the extra tax liability worthwhile.The other way to turn the 401(k) or IRA into a non-countable asset – is to make the asset disappear and liquidate the account.
IRS instructions for how to calculate required minimum distributions can be found by clicking on the link.
I recently had a potential client call me up and state confidently – “I need Medicaid, but I know I won’t qualify because I have a large amount of money saved in my 401(k).”It is true that qualified retirement accounts such as a 401k, Individual Retirement Account (IRA), or SEPs are usually large assets.
It is also true that 401k’s and IRAs are deemed a countable asset by Medicaid which, without proper Medicaid planning by an elder law attorney, would likely prevent someone from being eligible for Medicaid.
Elder Law Resources Equal Monthly Distributions Exception to 10% Early Withdrawal Excise Tax1. https://gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions Disability Exception to 10% Early Withdrawal IRS Excise Tax3. The tax consequences will need to be discussed with your financial adviser, CPA or other tax planner.
A referral to the appropriate tax specialist can be provided upon request.
The goal of every elder law attorney that handles Medicaid planning cases is to take countable resources and turn them into non-countable resources in accordance with Medicaid law and regulations.