What You Need to Know About Using an IRA to Pay for Long-Term Care

Legacy Lawyers NC

As you get older, the time eventually comes to consider how you will cover costs when you need assistance with daily tasks. Unfortunately, a nursing home stay isn’t just costly for you—it also eats into the assets you plan to leave for your family. To deal with that possibility, you may already have funds available to you in an IRA or 401(k). 

Here’s the catch, though—even if you have a large amount saved in a retirement account, you still need to plan for the possibility of needing to qualify for Medicaid coverage in the future to continue paying for a nursing home’s services. That’s when the advice of an elder law attorney becomes incredibly valuable, no matter how much (or little) money you currently have in reserve for a rainy day. 

How IRAs Complicate Medicaid Coverage for Long-Term Care

Many North Carolina residents significantly underestimate the costs of care in their elder years, whether they intend to stay at home or move to a facility with 24/7 care. The simple fact is that your IRA funds might run out eventually and you could end up still needing Medicaid to cover the remaining costs.

Because Medicaid is both a federal and state program, the specifics of how to qualify for nursing home coverage vary between individual states. In North Carolina, your IRA is considered a “countable” asset. That means anything saved up in your IRA will be considered when you are trying to qualify for Medicaid to pay for a nursing home stay. Due to the low asset thresholds used by Medicaid, just simply having an IRA will likely put you above the maximums for qualification. 

That fact could prompt you to liquidate IRA assets and place them in a trust so they aren’t entirely lost to the nursing home. There’s a potential problem going that route, however. IRAs typically feature penalties for withdrawing early before hitting a certain age cutoff—and even after reaching that age anything you remove from the IRA still becomes taxable.  

If you expect to remain physically healthy and stay in a nursing home for years, it is absolutely critical to discuss the pros and cons of any possible financial moves with an attorney, whether you need Medicaid or has enough in your IRA to cover costs. An experienced elder law attorney can help you decide between options like:

  • Spending down your existing assets.
  • Taking the tax hit for liquidating the IRA completely and then setting up a trust to protect the remaining amount. Paying the taxes for pulling everything from the account all at once can become a serious issue because the costs of nursing home stays are considerable.
  • Withdrawing smaller amounts from the IRA monthly to either cover long-term care insurance premiums or directly pay the costs charged by the nursing home
  • Dealing with Medicaid’s five-year asset lookback period.

That final point can be a bigger issue than you may realize. If you gave a large sum of money as a gift to your children several years ago for instance, or gifted property to a friend or family member, that can directly impact your ability to qualify for coverage when it’s desperately needed. The good news is that there are still options even if you weren’t aware of these pitfalls, as gifts can be legally reversed and trusts can still be set up to protect assets from being spent entirely on long-term care.

Any of these different strategies might work well for some families but could be detrimental to others. That’s particularly true if you are receiving Social Security benefits, as withdrawing from your IRA can cause problems there. 

Besides those potential issues, there are considerations beyond just using your IRA or qualifying for Medicaid when preparing for either a prolonged nursing home stay or aging in place. You may need to grant power of attorney to a family member if you won’t be able to continue making financial and medical decisions in the near future due to declining mental health, for instance.

Are You or Your Spouse Looking at the Possibility of a Nursing Home Stay?

Have questions about covering long-term care? We understand the importance of planning in advance so your family doesn’t experience a financial crisis in the event of a sudden change in health. Get in touch with Legacy Lawyers today so we can help offer some peace of mind for the future.

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