How to Pay for Long-Term Care: Retirement Plan Strategies

Trent Bradshaw CFP®, AIF® & Brandon Rogers CFP®, AIF® |
Categories
Long-Term Care

Planning can help

While it might sound simplistic, handling these issues starts with a conversation to get the ball rolling. The act of discussing and planning can help alleviate the emotional, financial and physical stress related to LTC. According to a 2018 study by Genworth, of those who prepared, 66% wished they had taken steps to plan sooner. In those situations where LTC was needed, 84% of caregivers and 75% of recipients report they would have “done things differently.” Without a plan, you may have to make in-the-moment and subpar decisions to help a loved one. Crisis planning can end poorly.

Explore Roth IRAs and backdoor Roth IRAs

Assets pulled from a traditional IRAs are taxed as ordinary income. Luckily Roth IRAs are funded with after-tax monies, and feature tax-free growth, tax-free withdrawals and no RMDs. Earmarking a Roth for LTC costs or premiums may be an excellent strategy.

  • Higher earners will also benefit by using what is called a backdoor Roth IRA. This is an IRS-permitted method allowing one to fund a Roth IRA even if income is higher than IRS limits for standard Roth contributions or conversions.
  • Funds can be used to pay for LTC costs or pay premiums for coverage. Please note—taxes must be paid on monies converted to a backdoor Roth IRA and it will likely count as income, possibly pushing one into a higher tax bracket.
  • It is always helpful to speak to a tax professional to assess every individual’s unique situation.

Use pre-tax savings, like an IRA

Another strategy designates pre-tax savings (IRA) to purchase LTC protection. Retirement assets can be surprisingly substantial and a good source for LTC needs. Some things to think about:

  • Tax change alert: The SECURE Act of 2019 instituted an important change to lifetime “stretch” IRA options. Previously, non-spouse beneficiaries were allowed to stretch their required minimum distributions (RMDs) over their life expectancies, thereby extending tax implications. The SECURE Act now requires non-spouse beneficiaries to take all distributions within a 10-year period following the death of the retirement account owner. This compels the beneficiary to pay taxes sooner.
  • As a solution, the IRA owner could purchase a hybrid life insurance policy with proceeds from the IRA and gain LTC coverage with a death benefit. If long-term care is not needed, the death benefit flows to the estate tax free.
  • To avoid the 10% penalty for those under 59½, consider using Rule 72(t) distributions to fund LTC premiums. This rule allows penalty-free withdrawals from IRAs and other tax-advantaged accounts and requires a specific distribution schedule, which will be taxed as ordinary income. There are some restrictions around this approach, but for those who are a year or two away from age 59½, it may be useful.

Start small. An initial conversation to get the ball rolling can go a long way. Next, integrate the discussion with the financial planning process, just as one would tackle saving for retirement or income in retirement. The risks and costs of long-term care are among the most important considerations—fortunately, there are an array of solid tactics and solutions available. Given the enormous potential impact on assets, we can all benefit from the dialogue.

 

Adapted from LifeHappens LTC & LifeHappens Careful Planning & LifeHappens LTC Options

This is meant for educational purposes only and should not be considered investment advice or a recommendation to take a particular course of action. Consult with a financial professional regarding your personal situation before making any financial decisions. Please be sure to discuss unique tax situations with a CPA or qualified tax professional.