At 73, the IRS Forced $38,000 Out of His IRA. The Nursing Home’s Medicaid Office Counted Every Dollar of It as Income Against Him

The IRS requires anyone who turns 73 to start pulling money out of a traditional IRA every year, whether they need it or not. Medicaid’s nursing home program then counts that forced withdrawal as income in the month the check lands. Two federal rules, no coordination, and a 73-year-old in a nursing home ends up owing thousands more toward his care because he obeyed the tax code.

The rule that pried the $38,000 loose is the Required Minimum Distribution, or RMD. Under SECURE 2.0, the starting age is 73. It is not optional. Skip it and the IRS assesses an excise tax on the amount you should have taken. The distribution is ordinary income for federal tax purposes, reported on Form 1099-R, and there is no “I did not want the money” exception.

Why Medicaid Treats the RMD as Countable Monthly Income

This is where families get blindsided, so it is worth slowing down. Medicaid and Medicare are different programs. Medicare pays for short rehabilitation stays after a hospitalization, capped at 100 days per benefit period with a daily copay starting on day 21. Long-term custodial care, the months and years of help with bathing, dressing, and eating, is not a Medicare benefit. That bill falls to Medicaid, and Medicaid runs two separate financial tests.

The asset test looks at what you own: countable savings, investments, a second property. The income test looks at what shows up in your name each month: Social Security, a pension, a distribution from a retirement account. An IRA can sit on one side of that line, the other, or straddle both depending on the state. The RMD itself, once distributed, almost always lands on the income side.

So when the custodian cuts a $38,000 check in December to satisfy the year’s RMD, the Medicaid caseworker records $38,000 of income for that month. In a state with a hard monthly income cap for nursing home Medicaid eligibility, a lump sum of that size can knock an applicant out of eligibility for the month it is received. For someone already enrolled, it inflates the patient liability, sometimes called the “share of cost,” which is the portion of monthly income the resident must turn over to the facility. Medicaid lets the resident keep only a small personal needs allowance (in many states a token amount for haircuts, toothpaste, a phone) plus set-asides for a spouse at home and certain medical premiums. The rest goes to the nursing home. A $38,000 income month means a $38,000 payment month, minus those small carve-outs.

IRA Treatment: One of the Most State-Dependent Rules in Medicaid

Whether the underlying IRA balance counts as a countable asset is genuinely one of the most state-dependent questions in all of Medicaid planning. Some states count the entire IRA balance as an available resource, which by itself can disqualify an applicant. Others exempt the IRA if it is in “payout status,” meaning the owner is taking scheduled distributions such as the RMD. A handful treat spousal IRAs differently from the applicant’s own. Two neighbors with identical finances can get opposite answers depending on which side of a state line they live on.

That variation is why elder law attorneys ask, first, what state the applicant lives in, and second, whether the state is an “income cap” state that recognizes a Qualified Income Trust (also called a Miller Trust). In income cap states, a Miller Trust can be the mechanism that lets excess monthly income, including a spiky RMD, flow through without blowing eligibility. Availability, funding rules, and what happens to trust funds at death vary by state.

Questions Worth Bringing to an Elder Law Attorney

The reader in this scenario did nothing wrong. He took the distribution the IRS demanded. The planning conversation is about timing and structure, and those conversations belong with a lawyer licensed in the applicant’s state.

• Does the state count the IRA as an asset, or exempt it while in payout status?
• Is a Qualified Income Trust available, and what income must be routed through it?
• Can the RMD be taken in monthly installments rather than a year-end lump so it never spikes above the income cap in any single month?
• Would moving the distributed funds into another account, gifting them, or paying down a relative’s expenses trigger the Medicaid five-year lookback and a transfer penalty?

The tax code and the Medicaid rulebook were written in different rooms by people who were not speaking to each other. This collision is one of several quiet drains on retirement accounts (we mapped nine of them, this one included, in a free tax trap guide). Families who plan around that silence keep more of the check. Families who assume the two systems coordinate learn, usually in December, that they do not.

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