Guess where most of our retirement savings is? Yep, in IRA’s and 401k’s, where every dollar we withdraw is taxable to us. It’s like adding a surcharge to everything we buy – need $40,000 for a car? If you’re in a 20% tax bracket, you’ll need to withdraw $50,000 to have taxes withheld and still have the $40k you need. Same thing goes for long-term care costs – need $7,000/month to pay for care? You’ll drain your IRA at a rate of $8,750/month to cover the tax cost too. (Not to mention that the extra $105k/year of withdrawals could push you into a higher tax bracket and higher Medicare charges…ugh). What’s a person to do? Let’s find some tax-free dollars instead, that can be used to cover potential home health care or full-skilled care costs:
1. Roth IRA dollars – I know I’m singing the same ol’ song, but retirement doesn’t get much easier than when you have tax-free Roth dollars to use at your discretion. You can build a Roth IRA with annual Roth conversions from a traditional IRA before our current low tax rates expire the end of 2025.
2. Traditional LTC policy – I’m the first to admit that traditional LTC policies have pro’s and con’s. Obviously, the big pro is that you buy yourself a big pool of tax-free dollars to use a wide range of care services. Downside? It’s not cheap, premiums may rise over time, and it’s typically “use it or lose it”. Which brings up my next idea…
3. Asset-Based LTC policy – by far my favorite solution, you get the leverage of insurance ($1 buys about $3 dollars of tax-free protection), you pay for it once and done, and if you never need it, a tax-free death benefit pays to your heirs. Multiple wins here. If you don’t have the cash to fund it outright, you can also do a tax-free exchange of cash value in an existing annuity or life policy you no longer need.
4. Accelerated death benefit of your life insurance policy – if you have a permanent life policy, check and see if it has an accelerated death benefit rider that lets you access your death benefit to pay for long term care costs. If you don’t have this feature, you can also borrow against the cash value of the policy, though you’ll get a bigger bang for your buck exchanging it for #3 above.
5. Reverse Mortgage – when all else fails, don’t forget you’re probably sitting on a sizable amount of equity in your home. A reverse mortgage allows you to tap the equity of your home while you still live there and retain title, without having to ever pay it back. Yes, there are fees associated with it and the amount you withdraw is accruing interest that eventually gets paid off when the house sells, but it’s worth comparing those costs against the tax costs of excessive IRA withdrawals and see which strategy is the cheapest.
See? Where there’s a will, there’s a way! No need to give Uncle Sam your tax money any sooner than absolutely necessary! Let me know if you’d like to learn more.