New Tax Law Has Big Advantages for Funding Long Term Care Expenses
While many Americans will find themselves in need of long-term care, only a fraction of them are financially prepared for that stage of their lives. According to the National Council of Aging, every day over 10 million Americans need help with their normal activities of daily living. By 2050, 20 percent of the population will be 65 or older. Recent government statistics indicate that there is a 70% chance that you will need long term care in your lifetime. However, Long Term Care Insurance products have become more expensive, with many insurers raising rates as much as 40% on existing customers. Some companies have stopped writing Long Term Care Insurance completely. Many seniors find the solutions are too costly or much too difficult to qualify, health wise. Others simply feel that they have invested in other retirement products and cannot afford to add yet another insurance premium cost to their annual budget.
If you find yourself falling victim to any or all of those obstacles, you may be in luck. Since January 1st, 2010, a new provision of the 2006 Pension Protection Act (PPA) was adopted by the IRS. You now will be able to convert an asset you currently own, including an annuity, into one that includes tax free long-term care benefits. In the case of an annuity, this process is known as a 1035 exchange. This exchange allows a partial or full conversion of a non-qualified annuity to a PPA compliant annuity which provides long-term care benefits. Given the newness of this provision, the products available to take advantage of this conversion are limited, but they are available. Most even cover Home Health Care so you don’t have to be in a care facility to be covered. Given a choice, most people would prefer getting care at home if possible.
The most significant advantage of this conversion is the income-tax component. While non-qualified annuity premiums are paid with after tax dollars, the tax deferred gains the annuity accumulates prior to withdrawal are subject to taxation coinciding with your current income-tax bracket. So, if you put $100,000 into an annuity which grows to $150,000 before withdrawals begin, you will pay income taxes on that $50,000 gain. The IRS treats withdrawals as interest first and your already taxed deposits as coming out last.
However, if that same annuity were to be 1035 exchanged into a PPA compliant annuity any money withdrawn for qualifying long-term care purposes are both surrender charge and income-tax free. So, under this conversion, if you were to exhaust all $150,000 of the annuity value on long-term care expenses, you would never have paid taxes on the gains. Under the traditional annuity, withdrawals for any purpose would be taxable to the extent of the gains as ordinary income. Under a PPA Annuity the money is leveraged so $150,000 can be worth $375,000 for qualifying long term care expenses.
The conversion also offers a number of advantages addressing availability concerns. Whereas many people find themselves in a position where overall health either precludes them from getting traditional long-term insurance or makes it cost-prohibitive, the underwriting for an annuity with long-term care benefits uses a simple approach. Health qualification is required, but is much easier than qualifying for traditional long term care insurance.
You can even fund the policy with non-annuity funds such as an IRA, money market account, and CD’s. This enables you to leverage those dollars up to 200%, if you are age 87 or younger. In some cases, you may find that you have long-term care benefits, but your spouse does not. Under an eligible person provision, your spouse may be added for long-term care purposes, extending the benefits of this conversion to your partner.
When considering a 1035 exchange, new surrender charges may sometimes apply to certain types of withdrawals not used for long term care expenses. Remember, there are even ways that you can use qualified dollars such as an IRA to fund tax free long term care benefits .Also, should you be fortunate enough to never need Long Term Care, all your funds, including interest , will pass on to your children, often completely tax-free! Financial stability is necessary for a comfortable transition into retirement. While most people would agree that it would be ideal to remain at home during these difficult years, that scenario does not always come to pass. There is a new way to address this critical need, using an asset or annuity you may already own. You will need to see a retirement planning expert to explore the nuances of the products available and determine how you may benefit from this new provision of the tax code.
ABOUT THE AUTHOR
David S. Wilkins, CRPC is the founder and president of Secure Retirement Solutions in Scottsdale. He is a 27 year veteran of the financial services industry. He has earned The Chartered Retirement Planning Counselor designation from the College for Financial Planning. Dave has helped many individuals with their investment and retirement planning needs since 1984. Take advantage of his expertise and experience to help you navigate the perilous world of investing and make sure your retirement assets and income are secure for the future and protected against long term care costs. His website is www.secureretirementplanning.com and he can be reached at firstname.lastname@example.org or 480-860-5677