Aging Options

Kiplinger: Paying for Long-Term Care from Your 401(k) Could Put You in Danger of a Major Tax Bite

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If you’re like most retirees, a significant portion of your retirement savings is in pre-tax accounts such as a 401(k), 403(b) or IRA. And like most retirees you’re probably concerned about how best to cover any future long-term care costs that might arise. According to this recent article from Kiplinger, if you were counting on covering those health-related costs from your pre-tax retirement account, you may very likely be in for a shock come tax time.

Long-Term Care: “the LTC Generation Meets the 401(k) Generation”

“For the first time ever,” writes financial planner Bradley White in the Kiplinger article, “the Long-Term Care generation meets the 401(k) generation.”  In other words, those of us who have spent the past three or four decades contributing to our pre-tax retirement accounts are now facing retirement without adequate preparation for the skyrocketing costs of long-term care. “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,” the article warns.

In Kiplinger’s view, our longer life spans have dramatically changed the landscape for today’s retirees. “We are just now, for the first-time, planning on a concept where we stop working and live 30 more years,” writes White. “Please take a moment to truly let that sink in.”  He says that “staggering” medical advancements have significantly increased the odds that we will live into our 80s and 90s, which in turn greatly increases the likelihood that we are going to one day need ongoing comprehensive skilled care – in a nursing home, assisted living facility, adult family home or with in-home health care. “That cost of care goes so far beyond the concept of ‘sticker shock’ to today’s retirees,” says White. “They literally aren’t comprehending it!”

Long-Term Care: We Need to Get Educated

White argues that today’s boomers approaching retirement (or already retired) need to get educated about the realities of long-term care. This means coming to grips with the differences between what Medicare pays for (that is, basic health insurance) and the long-term care costs that come out of our own pockets. We will need to understand the different care options that will be available to us, how much they’ll cost, and what those services and costs might look like when you need them ten or twenty years from now. Then, once we grasp some of the LTC basics, we can determine how all this will (or will not) work with our 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,” says White. “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.”  But those in the greatest peril are those in the vast middle ground of retirees who are not broke but not flush either. “I’m speaking to the retiree that has between a few hundred thousand and a few million dollars,” says White, “some or the bulk of which in pretax retirement accounts. This means I’m speaking to a massive amount of you heading into retirement.”

The Kiplinger article warns that there’s real danger in pretending you’ll never need long-term care. “On average nearly 70 percent of 65-year-olds will eventually need some form of LTC, according to the U.S. Department of Health & Human Services (HHS). HHS also estimates that 20 percent will need LTC for more than five years.”  In 2018 Genworth Insurance quoted the national median monthly cost for assisted living at $4,000 and for nursing care at nearly $8,400. (Those figures are significantly higher in many cities like Seattle.)  And therein lies the tax problem: “Every dollar you pull out of your pretax retirement accounts is taxable income, and the more you pull out in any one year, the greater chance that you vault yourself into higher and higher tax rates. Can you imagine the horrifying tax result of needing to pull those kinds of dollars out in any single year to cover the exorbitant LTC expenses? You can end up paying double or triple the tax rates on that 401(k) money because of this — or another way of saying it is that you can drain down your account twice or three times as fast!”

Long-Term Care: Don’t Face It Unprepared

One option, Kiplinger suggests, is long-term care insurance. Another choice is to diversify your savings and set aside more in after-tax vehicles such as Roth IRAs. In any event, White concludes, “The moral of the story is to not take the ostrich approach and bury your head in the sand when it comes to the topic of LTC. Because you never know, it might happen to you or a loved one. This is very real and can be devastating financially when you don’t have a plan and strategy in place for it.” Facing the issue unprepared leaves you with what White says are the three main options: pay a shocking amount in taxes; sell other assets (like your home) that you wish you didn’t have to sell; or end up becoming a burden to your family. None of these strikes us as a particularly desirable path to choose.

Why not choose the path of truly comprehensive preparation for all that your retirement future may hold in store? Contrary to the gloomy LTC picture painted in the Kiplinger piece, there are good options available to you – but it all starts with a comprehensive plan, the kind we at AgingOptions refer to as a LifePlan. Only a LifePlan combines all the elements of retirement living and weaves them together seamlessly, so that your finances, your health care (both immediate and long-term), your housing strategy and your legal protection are all interdependent, reinforcing each other. Add to this a plan to engage your family with your retirement strategy and you have a LifePlan. There’s no other retirement plan quite like it.

We invite you to join Rajiv Nagaich from AgingOptions and get the facts about this retirement planning breakthrough. Invest just a few hours and it will open your eyes to a better way to prepare for true retirement security. Visit our Live Events page for a current calendar of upcoming seminars – then sign up online or give us a call. To paraphrase the Kiplinger article, don’t take the ostrich approach and bury your head in the sand! Come to a seminar and get ready to really live in retirement. And meanwhile, age on!

(originally reported at

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