Often times when seniors transition to assisted living or nursing home care, they discover that their monthly income alone is insufficient to cover their costs of care. Seniors in this type of situation have to decide which of their assets they should use to cover such costs.
Seniors who have qualified plans such as individual retirement accounts often avoid taking distributions from these accounts because the distributions that they take are subject to income tax. However, there may be good reasons why paying for the costs of care from a qualified retirement account makes the most financial sense.
Qualified retirement accounts are accounts that someone will pay income tax on eventually. The person responsible for paying the income tax will be the person who takes a distribution from the account. That could be the account holder during his or her lifetime, or it could be the beneficiaries after the account holder dies. In many cases, the beneficiaries of these qualified plans are in higher tax brackets than the account holder was, AND unlike the account holder, the beneficiaries in almost all cases only have ten years to take all distributions from the account. Taking the distributions over ten years condenses how quickly the taxes must be paid and results in the beneficiary reporting more taxable income per year during the ten year withdrawal period.
If a senior enters long term care and uses the money in a qualified retirement account to pay for care first, he or she is preserving more of the tax free assets to leave to heirs or beneficiaries. Additionally, the senior may be able to offset some of the taxes he or she will owe by claiming a deduction for out of pocket medical expenses on his or her tax return.
If you or a loved one may be in need of long term care soon, contact Voelz, Reed & Mount to discuss care options and strategies for protecting assets.