Converting Traditional IRAs for Spousal Spend-Down
When a spouse enters a skilled nursing home—and may need Medicaid in the future—there are several well-known exempt assets. These include the couple's home, one automobile, burial reserves, and also any retirement accounts (including 401ks and IRAs) of the spouse not entering the nursing home. This exemption creates a very beneficial (and little-known) opportunity. If the couple's assets are sufficiently high that the couple must spend-down assets prior to the institutionalized spouse qualifying for Medicaid, this spend-down can take many forms, and should always be done under the careful planning of an attorney knowledgeable in elder law. A great opportunity for many spouses at home is the conversion of “traditional” IRAs into Roth IRAs, which causes the taxes due on such conversion to be paid at the time of conversion. The payment of such tax may be applied towards the amount required to be spent-down, and allow the spouse at home to receive his or her Roth IRA distributions tax-free thereafter. This opportunity should be carefully considered by families and conducted only under the supervision of an attorney and the family's financial planner and CPA.