Paying long-term care premiums from your IRA
May 1, 2025
How to Use Qualified Retirement Funds for LTC Coverage: Tax-Advantaged Strategies
Summary: You can legally use IRA distributions to pay for long-term care insurance premiums, though these distributions are taxable. This strategy allows you to convert retirement funds into tax-free long-term care benefits while potentially spreading tax liability over multiple years.
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Leveraging Your IRA for Long-Term Care Needs
One approach is an innovative policy combining an annuity and life insurance with long-term care. This product features a 10-year premium payment structure (20-year in California).
How The Policy Works: 6 Simple Steps
- Transfer Your IRA Funds: Move existing IRA money via direct rollover (“tax-free exchange”) into this annuity + LTC benefits. This transaction works like any other IRA transfer but includes a 25% boost toward the annuity value.
- Annual Premium Payments: The insurance company automatically creates a distribution from the annuity each year to pay the LTC insurance premium.
- Tax Reporting: You’ll receive Form 1099-R showing the taxable distribution for the premium payment.
- Pay Income Tax: Claim this distribution as income and pay taxes accordingly. These distributions can count toward your Required Minimum Distribution (RMD).
- Complete Funding: Over 10 years (20 years in California), your annuity funds are automatically transferred to fully fund the long-term care benefits.
- Receive Tax-Free Benefits: When needed, LTC benefits are paid tax-free. If care is never needed, the death benefit passes to beneficiaries income tax-free.
Key Benefits of This Strategy
- Stretches taxable distributions over multiple years instead of taking a lump sum
- Converts taxable retirement funds into tax-free LTC benefits
- May coincide with retirement years when your tax bracket could be lower
- Can satisfy Required Minimum Distribution (RMD) requirements
- LTC coverage leaves cash assets available for other purposes
Use IRA Funds for LTC Insurance with a 25% Boost
See how this tax-efficient strategy offers a 25% bonus towards your long-term care protection
Alternative Strategies for Using Qualified Retirement Funds for Long-Term Care
Beyond the strategy above, you have several flexible options for using retirement funds to secure long-term care protection. Each approach offers distinct advantages depending on your financial goals and preferences.
Option 1: Qualified Annuity + Hybrid LTC Insurance
This strategy allows you to create a personalized solution by:
- Purchasing a qualified annuity directly from your IRA funds across dozens of competitive providers
- Extending distributions over 15-20 years to minimize annual tax impact
- Directing those distributions to any hybrid LTC policy that best fits your unique planning needs
Option 2: IRA Funding for Traditional LTC Insurance
This strategy provides exceptional flexibility by:
- Using tax-qualified funds for more affordable traditional LTC insurance premiums
- Selecting from any available traditional LTC carrier (often at lower costs than hybrid policies)
- Utilizing a qualified Single Premium Immediate Annuity (SPIA) for lifetime premiums
- Converting your IRA distributions into guaranteed lifetime income which continues even after LTC claims begin
Option 3: Keep Your Current IRA Investments
This straightforward approach offers the greatest investment flexibility:
- Keep your IRA funds fully invested in your preferred diversified portfolio
- Take only the necessary annual distribution for LTC premium payments
- Maintain complete control over your investment strategy and asset allocation
- Choose any payment schedule that works for you (limited-pay or lifetime premium)
Key Takeaway: All three alternative strategies allow you to select from any available insurance carrier rather than being limited to a single company’s proprietary program.
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FAQs about Using Your IRA to Pay LTC Premiums
How does using my IRA for LTC insurance premiums affect my tax situation?
IRA distributions for long-term care premiums count as taxable income, potentially increasing your tax bracket. However, you may qualify for tax deductions on LTC premiums as medical expenses if you itemize deductions and exceed 7.5% of your adjusted gross income. Spreading distributions over multiple years through a 10-pay strategy can manage tax liability while converting taxable retirement funds into tax-free LTC benefits.
Tax Deductions for LTC Insurance
Can couples use this IRA strategy for shared long-term care coverage?
Yes, married couples can each use their individual IRAs to fund separate long-term care policies or a shared care rider. Some insurers offer specific “shared benefit” policies where spouses can access each other’s benefit pools if needed. This approach allows couples to leverage both retirement accounts while potentially reducing overall premium costs compared to purchasing two separate, full-benefit policies without shared features.
Can I use 401(k) funds for this LTC insurance premium strategy?
Yes, but you typically need to roll your 401(k) funds into a traditional IRA first. This type of rollover is tax-free when done as a direct transfer. Once in the IRA, you can implement a distribution strategy to pay long-term care insurance premiums. However, if your 401(k) is with a current employer, rollovers are generally not allowed until you retire or separate from service, unless your plan permits in-service withdrawals.
Will I pay penalties if I'm under 59½?
Yes, typically IRA distributions before age 59½ incur a 10% early withdrawal penalty in addition to regular income tax. However, if you qualify for exceptions like disability or substantially equal periodic payments (SEPP), you might avoid this penalty. Consult with a tax professional about your specific situation.
What is Hybrid Long-Term Care Insurance?
Hybrid long-term care insurance combines life insurance or an annuity with LTC benefits, creating a dual-purpose policy. If you need long-term care, the policy pays tax-free benefits for qualified expenses. If care isn’t needed, your beneficiaries receive a tax-free death benefit. This design eliminates the “use it or lose it” concern of traditional LTC policies while offering asset protection.
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About the Author: Craig Matesky
Reviewed by: Mike Berger
Disclaimer: This material is for informational purposes and is not intended to provide and should not be relied on for tax or accounting advice. ACACIA Insurance Services, Inc. and our affiliated licensed professionals, do not provide tax or accounting advice. We encourage you to consult your own tax and accounting advisors.