Thinking of Paying for Long-Term Care From Your IRA? Think Again.

Chances are a big portion of your retirement savings are in pretax accounts like a 401(k) or IRA. If you need to tap those accounts for costly care, you must realize that every dollar is taxable. And you might be shocked at the tax rates that come with withdrawals large enough to foot the bill.

By BRADLEY WHITE, CFP™, IAR | Epstein & White Retirement Income Solutions

For the first time ever, the Long-Term Care (LTC) generation meets the 401(k) generation. This is, unfortunately, giving a lot of people false confidence that they can pay for their future care someday through their retirement savings, only to eventually find the rude awakening from a tax perspective that awaits them.

However, there is something else that is a new major consideration for today’s retiree — LTC planning. Not to get too hyperbolic here, but we are just now, for the first-time, planning on a concept where we stop working and live 30 more years. Please take a moment to truly let that sink in …

Medical advancements have been staggering, and it’s a beautiful thing as far as how long we are all living. This, of course, means it’s increasingly likely we will live into our 80s and 90s, and thus need ongoing comprehensive skilled care in one way or another. That cost of care goes so far beyond the concept of “sticker shock” to today’s retirees. They literally aren’t comprehending it!

The first thing to do is get educated on the topic. You need to understand:

The major difference between Medicare providing basic health insurance, and LTC costs that come out of your pocket.
The different options you have for your care, and where you might need this care.
The expected costs of the various forms of care, and what they’ll look like when you might need them.

An Issue for Savers in the Middle

Once you have a general understanding, you can now look at how this will (or will not) work with your own retirement plan. If you, unfortunately, have not saved any money for retirement, then the cost of care for you will most likely be provided via Medicaid (which is currently very underfunded, with not the best facilities in the world even if you did get in). If you’ve saved up several million dollars in after-tax, non-retirement accounts, then the earnings alone from your money mean you can self-insure and will be fine if this happens to you someday.

I’m speaking to the retiree that has between a few hundred thousand and a few million dollars, some or the bulk of which in pretax retirement accounts, such as traditional 401(k)s and IRAs. This means I’m speaking to a massive amount of you heading into retirement. So, let’s paint a picture here …