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

Pros

Tax-Deferred Growth: Funds in an IRA grow tax-deferred until they are withdrawn. By using these funds for long-term care insurance, you can leverage the growth of your investments over time.
Asset Protection: Long-term care insurance can be a way to protect your assets from the potentially high costs of care. By funding it through your IRA, you're proactively ensuring that a portion of your retirement savings is earmarked for potential healthcare needs
Tax-Free Benefits: When you start claiming your long-term care insurance, the benefits you receive from the policy are tax-free, which can offer significant tax savings over time.
Flexibility with Spousal Benefits: Even if you don't qualify for long-term care insurance, you can use your IRA to fund a policy for your spouse, ensuring coverage for at least one member of the household.
Potential Tax Deductions: If you itemize your tax returns, you might be able to deduct the insurance premiums, offering additional tax savings.
Leveraging Non-Qualified Annuities: If you have a non-qualified annuity, you can use it to fund a long-term care policy without incurring taxes during the transfer. This strategy can offer a double tax benefit.

Cons

Reduced Retirement Savings: Using IRA funds to pay for long-term care insurance means you're decreasing the amount available for retirement. This could impact your quality of life or financial security in retirement if other funds aren't sufficient.
Tax Implications: While the benefits from the insurance are tax-free, you will pay taxes on the original amount you invested from the IRA into the policy.
Limited Options: Only a few companies currently allow the use of qualified money like IRAs to fund long-term care insurance while keeping the money deferred. This might limit your choices in terms of policies or providers.
Potential "Disqualification" of Funds: Some companies might gradually "disqualify" the money you use to fund the policy, meaning you'll pay taxes on it over time, even if it's still within the policy.
Locked-In Funds: If you change your mind or need the money for another purpose, it might be challenging or costly to redirect funds once they've been invested in a long-term care policy.
Complexity: Using an IRA to fund long-term care insurance can add complexity to your financial planning. It's essential to understand the various tax implications and potential consequences.

Conclusion

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.

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