If an individual retirement account (IRA) or 401(k) plan is part of your retirement portfolio, you might be surprised to learn that you don’t actually have total control over when you access the money. You probably understand that you cannot withdraw from these accounts without penalty before you turn 59 ½. After all, the money is for retirement age, so it makes sense that you must at least come close to the traditional age for retirement.
However, you may not be aware that you are required to start taking distributions—or withdrawals—from the account once you turn 72, regardless of whether you need the money or not. This rule can impact your income tax status and your ability to qualify for Medicaid to pay for long-term care. We explain what this all means and how our Medicaid Planning Attorneys can help you offset the potential impact of this rule.
Required Minimum Distributions of IRA Funds
Many of us think of our retirement accounts as nest eggs for the future—a safety net or backup plan. More and more Americans are working and earning wages well into their 70s and 80s. They might have accessible savings, or perhaps they sold the family home and made a considerable profit. For these reasons, many seniors don’t have a financial need to withdraw from an IRA or 401(k) right away. Unfortunately, that decision is not entirely up to them.
Under federal law—specifically the SECURE Act of 2019—you are required to take distributions from your retirement account starting at the age of 72. The amount you have to withdraw each year—known as your required minimum distribution (RMD)—is calculated based on your account balance and your life expectancy. If you are married and your spouse is the sole beneficiary of the IRA, their age also factors into the life expectancy number. Your account balance is then divided by the life expectancy number, and that amount is your RMD. For example, if your joint life expectancy is 24.6 and your account balance is $100,000, your RMD would be $4,065 per year.
There are other factors involved in determining your RMD, so it is wise to consult a financial advisor or the IRS to make sure you are withdrawing the correct amount each year. If you take the wrong RMD or do not take one at all, the amount not withdrawn will be taxed at 50 percent.
How the RMD Could Impact Your Qualification for Medicaid
If you are concerned about your assets and income because you are hoping to qualify for Medicaid to pay for long-term care, it is important that you work with a Medicaid Planning attorney to account for the money in your IRA and the required minimum distribution you will start taking when you turn 72. There are ways to protect these assets and to redirect the income so that your Medicaid benefits are not put at risk. However, this requires advance planning so that you do not violate Medicaid’s five-year look-back period.
What If You Die Before Retirement Age?
If you die before touching your retirement accounts, they will be inherited by the named beneficiaries. If that is your spouse, the same distribution rules that applied to you will apply to them. However, if it is anyone other than your spouse, they will be required to withdraw all of the money in the IRA within ten years of your death, regardless of the heir’s age. These distributions are treated as income, so this can be a significant tax burden on heirs if they are also at the height of their earning potential. An experienced Estate Planning Attorney can help you plan for this possibility by creating a Trust to inherit the funds instead of your children.
Are You Looking for a Medicaid Planning Attorney in Texarkana, TX?
Qualifying for Medicaid to pay for a nursing home requires informed advice and proactive steps. If you are looking for Medicaid Planning advice, you need to speak with an experienced attorney as soon as possible. Contact us online or call our Texarkana office directly at 903.223.5653. We also have offices in Tyler, Paris, and Longview, as well as Magnolia, AR!