IRA & Retirement Planning

In today’s world, employer sponsored pensions are rare and Social Security retirement benefits have not kept up with the cost of living. As a result, you may be one of the millions of Americans who has opted for self-funded retirement options such as Individual Retirement Accounts (IRA). If so, it is important that you understand how your IRA will be treated if you need to apply for Medicaid as a senior as well as the tax consequences of inheriting an IRA. At Slaton Schauer Law Firm, PLLC we can work with you to incorporate your IRA into your existing estate plan to ensure that your assets are not at risk.

How Will Medicaid Treat Your IRA?

During your senior years there is a very good chance that you (or a spouse) will need long-term care. Because neither Medicare nor most private health insurance plans will pay for long-term care, you may find yourself needing to qualify for Medicaid which does cover long-term care expenses. Eligibility for Medicaid will depend, in part, on your income and countable resources. Medicaid will count your IRA as part of your countable resource unless it is in payout status. “Payout status” means that you are taking at least the required distribution out of your plan monthly. If your IRA account is in payout status, however, the monthly payment will be counted as income which will count toward the Medicaid income limits. Either way, your IRA will be considered when applying for Medicaid which should be considered in your overall estate plan.

What Happens to My IRA after I’m Gone?

Assets held in an IRA account can be paid out to the beneficiary shortly after the owner’s death because retirement accounts are “non-probate” assets, meaning they bypass the probate process. If a spouse is the beneficiary of a traditional, he/she has three options:

1. Treat it as his/her own IRA by designating himself/herself as the account owner.
2. Treat it as his/her own by rolling it over into a traditional IRA, qualified employer plan, qualified employee annuity plan (section 403(a) plan), tax-sheltered annuity plan (section 403(b) plan), or a deferred compensation plan of a state or local government (section 457(b) plan)
3. Treat himself/herself as the beneficiary of the IRA.

If the IRA is a Roth IRA, the entire interest must usually be distributed by the end of the fifth calendar year after the year of the owner’s death.  The exception to this general rule is if the interest is payable to a designated beneficiary over the life or life expectancy of the designated beneficiary. In that case, distributions must begin before the end of the calendar year following the year of death. If the sole beneficiary is the spouse, he or she can either delay distributions until the decedent would have reached age 70½ or treat the Roth IRA as his or her own.

Inheritance Planning for Your IRA

If you have an IRA, it is important to incorporate it into your inheritance plan. If you fail to do so, the funds held in your IRA could be at risk if you need long-term care in the future. You also want to be sure you understand any possible tax consequences for your beneficiaries and plan accordingly.

Contact Us

The IRA inheritance planning attorneys at Slaton Schauer Law Firm, PLLC look forward to helping you incorporate your IRA into your comprehensive estate plan. Contact our office today by calling 512-258-9455 or filling out our online contact form.