Can I Pay For Long-Term Care Insurance With My IRA?
A common question I'm asked is: Can I pay for long-term care insurance with my IRA? I give a detailed explanation in the video above, but for those who prefer to read, here's a summary of what I cover:
First, What is "Qualified Money"?
Before we get into into the main topic of using an IRA to fund a long-term care insurance policy, it's essential to understand the term "qualified money."
In the context of retirement funds and taxes, "qualified money" refers to any money that is tax deferred. This means you did not pay taxes when you deposited the money into the account, nor have you paid taxes on any subsequent growth.
Common examples of accounts with qualified money include 401k, 403B, 457, and, of course, IRAs. It's important to note that once you start withdrawing from these accounts, taxes become due. Currently, most individuals will start paying these taxes at the age of 73, although this age is expected to rise to 75 by 2035.
Using Qualified Money for Long-Term Care Insurance
Yes, you can use your qualified money to fund an asset-based long-term care insurance policy. However, there's a catch. Presently, only two known companies allow you to keep this money deferred until you claim your insurance.
Some other firms do offer the option of using qualified money, but they will gradually "disqualify" it. This means that you will pay taxes on that money over a set period, even if it remains in the long-term care policy. The silver lining? Once you start claiming, all the money you receive is tax-free.
Tax Implications of Benefit Checks
When you start receiving your benefit checks from the long-term care policy, it's important to understand the tax implications. You will pay taxes on the original amount you invested into the policy. However, any amount you receive beyond your initial investment is tax-free. This provision can be particularly beneficial if you have a lifetime long benefit.
Loopholes and Lesser-Known Strategies
There are a few intriguing strategies and provisions related to IRAs and long-term care insurance:
- Spousal Benefits: If you don't qualify for long-term care coverage but have an IRA, you can use your IRA to pay for your spouse's long-term care policy.
- Non-Qualified Annuities: A strategy many advisors aren't even aware of is the potential of non-qualified annuities. If you've already paid taxes on the money you put into such an annuity, you can exchange it for a Pension Protected Act long-term care policy without any tax implications during the transfer. Even better, when you start claiming from this policy, you won't pay any taxes on the money withdrawn.
- Tax Deductions: If you itemize your tax returns, you can deduct the expenses of the insurance premiums. This benefit might be more relevant for individuals who own entities like an S-corp.
Pros & Cons of Using an IRA to Pay For Long-Term Care Insurance
Long-term care insurance can be a valuable asset in ensuring a comfortable and financially secure retirement. Leveraging your IRA or other qualified money can be an effective way to fund such a policy, but it's vital to understand the nuances and potential tax implications.
For a more personalized approach to your financial strategy and to look into how long-term care insurance would look in your specific situation, I encourage you to book a call using the schedule button below.