IRA Planning for Long-Term Care and Longevity

Hollywood actress Betty Davis was quoted as saying, "Old age ain't no place for sissies." Unfortunately (or fortunately, depending on how you view it) more people are reaching older ages today than ever. We always encourage clients to consider long-term care insurance as a way to help pay for nursing home care, but relatively new retirement savings plan offers an additional option for IRA owners younger than age 70 that think they might exceed the average life expectancy.

Aging and Long-Term Care Statistics

People often say things like "Americans are living longer" and "more and more people need nursing home care," but what information supports those general statements? This is what we have found:

* Information published online by the US Centers for Disease Control and Prevention at: http://blogs.cdc.gov/nchs-data-visualization/deaths-in-the-us/) shows that the average US life expectancy increased from 47.3 years of age in 1900 to 78.8 years of age in 2013.

* Information published online by the US Department of Health and Human Services at http://longtermcare.gov/the-basics/how-much-care-will-you-need/# says (on average),

o Someone turning age 65 today has almost a 70% chance of needing some type of long-term care services and supports in their remaining years

o Women need care longer (3.7 years) than men (2.2 years)

o One-third of today's 65 year-olds may never need long-term care support, but 20 percent will need it for longer than 5 years

Many more statistics appeared in an online MorningStar article by Christine Benz on August 9, 2012, at http://news.morningstar.com/articlenet/article.aspx?id=564139, but the picture seems clear that both statements about living longer and people needing nursing home care are true.

Long-Term Care Insurance

Long-term care insurance help solve the nursing home expense problem for people who can afford long-term care insurance premiums. Unfortunately, many people delay purchasing the insurance until their health conditions disqualified them from coverage. Most other people just decide that the insurance is too expensive.

Long-Term Care Planning with IRAs

An ordinary individual retirement plan (IRA) contains money contributed by the plan owner from income on which the plan owner never paid income taxes. Earnings inside the IRA grow without triggering taxation until the plan owner begins withdrawing from the plan, and then 100% of every withdrawal is taxable as income.

If a retired IRA owner requires nursing home care, and if the cost of nursing home care is more than 7.5% of the IRA owner's adjusted gross income (AGI), the portion of the nursing home care in excess of that 7.5% of AGI (the average annual cost of an Indiana resident's nursing home care is more than $71,000) is a tax-deductible medical expense. Therefore, it is always advisable for an individual or a married couple to pay nursing home expenses out of IRA accounts before spending non-IRA funds.

Qualifying Longevity Annuity Contract (QLAC)

The IRS adopted new regulations in 2014 concerning a relatively new investment product designed for Americans that expect to exceed the average life expectancy. Ordinarily, an IRA owner is required to begin withdrawing from an IRA account when the owner reaches the age of 70 ½ years, but the required withdrawal pace is designed to nearly eliminate the IRA by the time the owner reaches age 90. The new investment strategy, known as a Qualifying Longevity Annuity Contract (QLAC), allows an IRA owner to transfer up to $125,000 from an IRA to a QLAC and set a required beginning date for withdrawals as late as age 85. This delayed withdrawal allows more time for a QLAC to grow on a tax-deferred basis and allows the plan owner to concentrate wealth to pay the cost of living through longer than average longevity.

Ask Your Financial Advisor

A healthy person cannot control the aging process or the cost of living an unusually long life. A wise person with long life potential will consider how to stretch financial resources to support a long life. We encourage people to speak with their financial advisors about all of these long-term care financial planning alternatives and choose a strategy carefully. Even the best laid plans may fail, but careful planners stand a better chance of achieving good outcomes than people who do not plan.

Jeff R. Hawkins and Jennifer J. Hawkins are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers and Jeff is a Fellow of the American College of Trust and Estate Counsel. Both lawyers are admitted to practice law in Indiana, and Jeff Hawkins is admitted to practice law in Illinois. Jeff is also a registered civil mediator and was the 2014-15 President of the Indiana State Bar Association.