Retirement Accounts and Special Needs Planning: Avoiding Benefit Pitfalls
When planning for your own financial security, or that of a loved one with a disability, it’s natural to focus on cash savings and investments. However, one asset that can create unexpected challenges for eligibility for government benefits is a retirement account, such as an IRA or a 401(k).
For programs like Social Security’s Supplemental Security Income (SSI) and/or Medicaid, eligibility is based on strict income and asset limits. In most states, the countable asset limit is just $2,000 for an individual. Many people are surprised to learn that the value of a retirement account, whether traditional or Roth, may be considered an available asset for someone with a disability. Even if the funds are not currently being withdrawn, agencies may still treat the account as “available” because the owner can access it, regardless of potential penalties for early withdrawal. As a result, an IRA or 401(k) in the beneficiary’s name could disqualify them from means-tested benefits unless strategic planning steps are taken.
If an individual with a disability already owns a retirement account, one possible solution is to cash out the account and transfer the funds into a self-funded special needs trust (also called a first-party special needs trust). This type of trust is specifically designed to hold the beneficiary’s own assets while still allowing them to remain eligible for SSI and Medicaid.
Using retirement savings to fund a special needs trust requires careful consideration. Cashing out an IRA or 401(k) will trigger income taxes, and if the account owner is under age 59½, it may also result in a 10% early withdrawal penalty, both of which reduce the amount available to fund the trust. Timing is also important: if the transfer is not completed before applying for benefits, the account’s value could make the individual ineligible until it is moved into the trust. By law, self-funded special needs trusts must also include a Medicaid payback provision, requiring that upon the beneficiary’s death, any remaining assets are used to reimburse the state for benefits provided.** Additionally, the trust must be administered carefully to avoid making direct cash payments to the beneficiary, which could reduce or suspend SSI benefits.
Navigating the intersection of retirement accounts, trust law, and public benefits can be complex. Each situation requires a personalized analysis of tax implications, investment potential, and the timing of trust creation. The best outcomes often come from working with a coordinated team, which may include an estate planning attorney experienced in special needs planning, a special needs trust administrator/manager like The Arc of Northern Virginia, and a financial advisor who can balance benefit preservation with long-term resource growth.
While retirement accounts can sometimes be a barrier for benefit eligibility, they can also be a valuable resource. With the right planning, and especially with the strategic use of a self-funded special needs trust, these assets can be preserved to enhance quality of life while keeping essential benefits intact.
**When establishing a self-funded special needs trust with The Arc of Northern Virginia, the grantor (person creating the trust) can elect to leave 100% to our Personal Support Self-Funded Remainder Trust in lieu of the Medicaid payback; this enables The Arc of Northern Virginia continue our mission of supporting people with disabilities in the community.
Funding Your Special Needs Trust: A Practical Guide — Now and Later
Making sure a special needs trust is funded correctly protects benefits and provides meaningful support for the future. There are many ways to fund an account with our program, both now and as part of a long-term plan, and it is important to understand the steps involved so the process is smooth and the funds are handled in a way that maintains eligibility for public benefits.
For families who wish to fund their account right away, contributions can be made by check, ACH transfer, or wire deposit.
- When funding by check, it should be made payable to The Foundation of The Arc of Northern Virginia, with a memo line referencing the specific sub-account (also called the trust) where the funds should be deposited. If you are unsure of the correct wording, our “Check Writing Guidelines” handout or our Account Coordinator for Incoming Funds, Grace Rhodes, can assist you.
- Please also mark “SF” for self-funded trusts or “FF” for family-funded trusts.
- Checks should be mailed to our office at:
The Arc of Northern Virginia
ATTN: Special Needs Trust Department
3060 Williams Drive, Suite 300
Fairfax, VA 22031
Those choosing to fund by ACH or wire deposit would first need to complete the appropriate form to communicate the intent of the deposit. Upon completion, this form would need to be returned to our Account Coordinator for Incoming Funds.
- If sending via email, please first reach out to Grace as she can send you an encrypted email to ensure security.
- Once received, we will either initiate the ACH deposit directly from the provided account
OR - Send you wire instructions so your bank can direct the funds to the correct sub-account
So when would you fund an account? Many families begin with an initial “seed” deposit of $500; while the intent of the $500 is not to commence disbursing from the trust, rather this seed money would transition the account from being billed an annual unfunded account fee to an annual maintenance fee that would be deducted directly from the account balance, making ongoing account management easier without requiring a large initial contribution.
With this in mind, it is important to remember that funding does not need to happen all at once. Through careful estate planning, one can arrange for assets to be directed to the trust in the future so your loved one benefits later. Retirement accounts such as IRAs and 401(k)s, payable-on-death or transfer-on-death accounts, certificates of deposit, wills, living trusts, and life insurance policies, etc. can all be structured to benefit the special needs trust. If and when the time comes to do so, it is essential that these tools explicitly name the established special needs trust as the beneficiary, rather than naming the individual with the disability. Unfortunately, if funds are left directly to the person, they may become “first-party” assets, which cannot be deposited into a family-funded or third-party trust and may jeopardize benefit eligibility.
When planning to direct assets to the trust, request the exact beneficiary designation language from our Account Coordinator to ensure the funds will transfer correctly. Include any identifying details needed, such as the trust date, trustee name, or trust EIN, depending on what your bank or plan administrator requires. Work closely with your attorney and tax advisor, especially when retirement accounts are involved, to determine whether naming the trust or an individual (or a combination) best meets your goals and to understand the tax and distribution effects. Once your beneficiary forms or will provisions are complete, let us know so we can confirm the trust is correctly named and maintain documentation for future reference.
It is important to remember that funding a special needs trust requires attention to both wording and process. Small mistakes can result in funds going to the wrong place or create unintended tax or benefit consequences. Our team is here to guide you at every stage and we strongly encourage you to refer to your estate planning documents now to ensure all is in order.
If you would like to begin funding an account now, or to confirm your trust is accurately referenced in future estate plans, please contact our Account Coordinator for Incoming Funds to obtain the necessary forms and confirm payee language. Taking these steps today ensures your loved one’s trust will serve them exactly as intended, both now and in the years to come.
For clients with an unfunded special needs trust, please be aware that the Grantor listed on the account should have received a QuickBooks invoice, or a mailed invoice if an email was not on file, in early July 2025. This invoice covers the annual administrative fee for maintaining an unfunded sub-account, as outlined in your Joinder Agreement and our current fee schedule, from July 1, 2024, through June 30, 2025.
In order for a trust to remain in good standing, Grantors must pay both the initial enrollment fee and any annual renewal fees, including this unfunded account fee.
Please note: a trust sub-account cannot reach Funded Enrollment, Distributions Authorized status unless it is in good standing.
While this invoice is for the current year’s fee, any unpaid fees from previous years were also included if they remained outstanding.
We appreciate your attention to this matter. Should you have any questions, please get in touch with us and we’d be happy to assist.
Invoiced Maintenance Fees for Unfunded Special Needs Trusts
For clients with an unfunded special needs trust, please be aware that the Grantor listed on the account should have received a QuickBooks invoice, or a mailed invoice if an email was not on file, in early July 2025. This invoice covers the annual administrative fee for maintaining an unfunded sub-account, as outlined in your Joinder Agreement and our current fee schedule, from July 1, 2024, through June 30, 2025.
In order for a trust to remain in good standing, Grantors must pay both the initial enrollment fee and any annual renewal fees, including this unfunded account fee.
Please note: a trust sub-account cannot reach Funded Enrollment, Distributions Authorized status unless it is in good standing.
While this invoice is for the current year’s fee, any unpaid fees from previous years were also included if they remained outstanding.
We appreciate your attention to this matter. Should you have any questions, please get in touch with us and we’d be happy to assist.
Reminder: Pre-Approval for Expenses Over $300
As part of our trust program, we want to remind families that any expenses exceeding $300 must seek pre-approval through our disbursements team. This process ensures that your intended purchases are reviewed and covered when the need arises. By doing so, we can work to maximize health insurance coverage and other government benefits, ultimately reducing the financial burden on the trust. To seek pre-approval, please email our disbursements team with details of the intended purchase. This proactive step will help ensure that your expenses are appropriately covered and processed without delay. Thank you for your cooperation!
Streamlining Disbursement Requests
We want to remind our community about our dedicated email address for submitting disbursement requests: disbursements@thearcofnova.org. This centralized email is monitored by our disbursement team during business hours, ensuring that your requests are handled promptly and efficiently.
We encourage all families and individuals to continue using this email address for all disbursement requests. By doing so, we can streamline our communications and enhance the processing of your requests.
Who Does What?
- Ana Hughes, Director of Trusts: Ana oversees the operations and management of the Special Needs Trust department; she also offers consultations to potential clients, and supports through establishment appointments when wanting to open a Special Needs Trust. If you have feedback about your experience with us, she’s the one to talk to.
- Kevin Collins, Assistant Director of Trusts: Kevin assists with various tasks relating to the management of existing special needs trust accounts with The Arc of Northern Virginia. Kevin supports the team in providing information surrounding questions of existing accounts, managing and maintaining accurate records for our clients, and spearheads trust management surrounding trust closures after notification of a beneficiary’s passing. Kevin also continues to work diligently in supporting the department with communication between the Trust Manager (The Arc of Northern Virginia) and our appointed trustee, Key Private Bank.
- Trini Nsabimana, Account Manager: Trini spearheads the disbursement side of our program and ensures requests are reviewed and submitted through our standard process; she’s here to ensure outgoing funds are processed for review, and follows through with the payments from KeyBank. She’s also able to assist with reviewing disbursement options (forms, purchasing cards, etc.).
- Allie Shelby, Account Coordinator, Outgoing Funds: Allie primarily supports in the disbursement process, often being the first point of contact for Trust clients when submitting requests. Allie helps with pushing through these requests for review, providing updates surrounding requests, and can help set up disbursement purchasing cards, such as True Link and Key2Business cards.
- Grace Rhodes, Account Coordinator, Incoming Funds: Grace’s primary role within the department is to process all incoming funds, including ACHs, checks, and routing wire transfers. She can help with guiding how to add funds to a trust account, and support with the follow-through to ensure they’re deposited to the directed sub-account (i.e. trust).
- Fiona Wright, Client Coordinator: Fiona assists existing clients with navigating the Trust department and can answer questions and offer guidance you may have about your existing account.
- Emelina Warsing, Administrative Coordinator: Emelina provides administrative support to the entire Trust team. She schedules consultations and establishment appointments, provides follow up information as necessary/requested, and can route you to the correct party when you have requests.