Fong Law Group

Medicaid's Gift to Children Who Help Parents Postpone Nursing Home Care

In most states, transferring your house to your children (or someone else) may lead to a Medicaid penalty period, which would make you ineligible for Medicaid for a period of time. However, there are circumstances in which transferring a house will not result in a penalty period.  

One of those circumstances is if the Medicaid applicant transfers the house to a "caretaker child."  This is defined as a child of the applicant who lived in the house for at least two years prior to the applicant's entering a nursing home and who during that period provided care that allowed the applicant to avoid a nursing home stay.  In such cases, the Medicaid applicant may freely transfer a home to the child without triggering a transfer penalty.  Note that the exception applies only to a child, not a grandchild or other relative.

Each state Medicaid agency has its own rules for proof that the child has lived with the parent and provided the necessary level of care, making it doubly important to consult with your attorney before making this (or any other) kind of transfer.

Others to whom a home may be transferred without Medicaid's usual penalty are:

• Your spouse
• A child who is under age 21 or who is blind or disabled
• Into a trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the Medicaid applicant, under certain circumstances)
• A sibling who has lived in the home during the year preceding the applicant's institutionalization and who already holds an equity interest in the home

How Much Will It Hurt to Tap Retirement Savings?

“If you are looking to pull cash from your 401(k) plan or traditional IRA without getting hit with a penalty, the IRS will allow you to do it.”

This is a move of last resort. You’ll need to do all the research to be sure this will not do more damage to your retirement savings than absolutely necessary. You are allowed to take a series of equal payments from your IRA or a 401(k) account, without being subject to a 10% penalty—but only under certain circumstances, advises CNBC in the article “How to tap your retirement savings without getting hit with a stiff penalty—but only if you absolutely have to.”

Taking an early withdrawal from a qualified retirement account before age 59½, results in a hefty 10% penalty in most situations. You must also add the taxes that you have to pay on the distribution itself. Yes, it’s your money but you agreed to keep it in the account under certain distribution limitations and the rules are not very flexible.

Except, when they are.

There are very specific sets of circumstances, when the IRS will let you take the early withdrawal and not have to pay a 10% penalty. One of these is receiving a series of equal payments from your IRA or 401(k), known among tax advisors as a “72(t) distribution.”

However, be careful: just because you can do this, doesn’t mean you should do it.

There are rules (of course!). You have to commit to take at least one payment a year for five years or until you reach 59½, whichever is the longer period of time. After that period is over, you can change your payment amount or stop the withdrawals.

If your money is in a 401(k), the rules are a little different: you must separate from service during or after the year you turn 55, in order to start taking payments.

However, if you make changes to your payments or if you go into the account for an additional withdrawal, you’ll get slammed with that 10% penalty retroactively for payments received plus interest.

What if you roll a 401(k) into the IRA after these series of payments? Don’t do it. That is a big mistake that could cost you plenty.

The numerous ways you can make a mistake and end up with a costly bill in penalties and taxes, makes this a no-no for practically every CPA.

Your alternatives: have an emergency fund or even take out a home equity line of credit. A 401(k) loan would be even better, as long as you know that you can pay it back.

Depending on the circumstances of your emergency, there may be some instances, where the IRS may waive your 10% penalty. But look, this is not a do-it-yourself project. Make sure you have excellent advisors on your team, if you need to take this step.

Reference: Financial Planning (Sep. 10, 2018) “How to tap your retirement savings without getting hit with a stiff penalty—but only if you absolutely have to”