The Why and How of Using IRA Savings to Fund Your Long Term Care Strategy

Paying for long-term care is one of the biggest retirement planning concerns for most people, especially with rising healthcare costs. Medicare, Medicaid and health insurance will only cover your expenses for a short period if at all.  Most programs have major limitations when it comes to choosing how and where you receive care.

How Does Long-Term Care Affect Your Retirement Planning?

The annual cost for home healthcare is $50,000 or more, while nursing home care costs up to $80,000 annually. As a result, you could end up spending anywhere from $300,000 to over a million if you or your spouse need to rely on assisted care and/or managed healthcare for an extended period of time after you retire.

If that wasn’t bad enough, these costs are also rising every year. When you no longer have regular income to fall back on, long-term care could eat up your savings and throw your retirement plan out of the window!

Funding LTC Insurance with Your IRA: How It Works

Investing in LTCi or Long Term Care insurance plans is a wise move for any retirement planning strategy, but these policies are usually too expensive to buy outright. As with healthcare costs, even the cost of these plans is going up every year. As such, does it really make sense to use your retirement savings to pay for LTCi?

If like most retirees, the majority of your retirement fund is parked in an IRA, Roth IRA, 401(k) or 403(b) plan, this might be a good option. This is especially useful when you have accumulated a large nest egg, and don’t really need all the income from your IRA.

Transferring your IRA savings to an asset-based LTCi plan allows you to pay for long-term care expenses with tax-advantaged funds, while turning taxable money into a tax-free legacy for your beneficiaries. How does it work? By repositioning some of your IRA savings into an LTCi product, through a trustee-to-trustee transfer of funds.

In addition to providing you with financial coverage for long-term care, these accounts also pay out tax-free death benefits to your heirs in case of your demise. In most cases, IRA-based LTCi policies also offer you a complete refund of the premiums you’ve paid in case you decide to withdraw your money at some point.

How to Transfer IRA Savings to LTCi

Here’s how to reposition money from your IRA into an asset-based LTCi plan:

  • First, apply for a 20-pay life insurance plan that has an LTC rider or features. If you’re approved, you can fund this plan with an IRA-based annuity.
  • Apply for an IRA-based annuity plan which offers an annual income of the same dollar value as the life insurance plan’s premium, over a 20-year period.
  • Instruct the annuity plan’s provider to directly transfer the annual income from the annuity into your 20-pay life insurance plan.
  • After receiving approval, pay the up-front cost for the 20-year annuity with a direct transfer of funds from your IRA.

Essentially, your tax-qualified IRA annuity will now make internal distributions to the life insurance carrier every year for 20 years. You will receive a 1099-R tax form for the amount of taxable IRA money moved into the 20-pay plan every year. Since you’re paying income tax on this amount, payouts from the life insurance plan will not be taxed.

This way, you can indirectly pay for long-term care coverage while ensuring that neither you nor your heirs face an extra tax burden on payouts/death benefits from the life insurance plan.

Author Bio :

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last 10 years has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement as well as,, SAP, MoneyForLunch, Biggerpocket, SocialMediaToday and NuWireInvestor. If you need help and guidance with traditional or alternative investments,  visit