Can Medicaid Make You Spend Down Your IRA or 401(k)?

Medicaid is a federally subsidized program to provide health services and health insurance to the poor. Although it is a federal medical program, Medicaid is primarily state-administered. This means that each state is free to set its own criteria for Medicaid eligibility, provided they observe broad federal guidelines.

Eligibility Requirements

There is no hard and fast answer to how much and what kind of assets you may retain and still qualify for Medicaid. States typically impose two separate tests for Medicaid eligibility -- the income test and the asset test. You must have income under a certain level, or under a certain percentage of the federal poverty line for a given-sized family to qualify for Medicaid. Additionally, you may have to show that you have very little in the way of assets -- typically under $2,000, though rules vary by state.

Exception to Eligibility Rules

Some states exempt pregnant and nursing women and the mothers of young children from the usual asset restrictions. A pregnant or nursing mother, in some states, may be able to qualify on the basis of low personal income without regard to the amount of assets she owns in her name.

Countable and Non-Countable Assets

Many states allow Medicaid beneficiaries to retain certain types of assets and still allow them to qualify for Medicaid. For example, you may be able to retain a certain amount of home equity, life insurance, a burial plot, certain annuities or a modest car and still be able to qualify. In these cases, the state will put a lien on the Medicaid recipients' assets and collect them as a creditor when the recipient passes away. IRA balances are considered "countable" assets. They count against you when you calculate whether your overall net worth passes the asset level eligibility criteria.

Retirement Accounts

Some states provide an exemption to assets in 401k and IRA from consideration when determining medicaid eligibility and some states consider these assets to be "countable." Specifics depend on your particular jurisdiction. In the case of 401k plans, the general rule is that only the balance of the plan that is actually available to be withdrawn is counted against you or in determining eligibility. Some IRA plans put restrictions on when the money can be taken out. If your 401k or other pension plan restricts how much of your money you can actually pull out of the fund, the IRS will not hold 401k assets that you cannot spend against you.