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Life Health > Long-Term Care Planning

Roth IRAs Could Fund a Long-Term Care Plan

By Allison Bell

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Kassi Hyde has clients who jaywalk, fail to floss their teeth three times a day and lack stand-alone long-term care insurance with unlimited lifetime benefits and 5% annual compound inflation.

Hyde is a Peachtree Corners, Georgia-based wealth management advisor with Apollon Wealth Management, and she has learned that long-term care plans can take many forms.

One possibility: Some clients could put the money they’ll use to pay for care in a Roth individual retirement account.

That’s not the strategy envisioned by the planners who once dreamed of equipping every prudent U.S. citizen with stand-alone LTCI, but for some clients, Hyde said, it fits.

The need: When Hyde works with clients who need a long-term care plan, she starts by exploring their personal experiences with aging and care.

“Many people have had loved ones deal with a long-term care need, and it has colored their opinion about buying long-term care,” Hyde said.

The original LTC planners, who may have known families that had to help loved ones live with severe dementia for 20 years or more, argued that buying stand-alone LTCI was by far the most efficient way for a family to protect itself against the devastation caused by a need for many years of long-term care.

Today, Hyde said, she usually recommends products that combine long-term care benefits with life insurance, which pay for less care per premium dollar but always end up paying benefits to someone.

“This is because the need is uncertain,” Hyde said. “Most clients want the death benefit should they never use the policy.”

The strategies: Here are seven things that Hyde does to create LTC plans — including the Roth IRA LTC funding strategy.

1. She does talk about insurance.

“I ask if they like the peace of mind insurance provides,” she said. “I also point out that insurance allows you to leverage your dollars.”

People who use stand-alone LTCI coverage or life-LTC combination products have a great deal of coverage the first day the arrangement is in effect.

People who dedicate a different asset to funding LTC needs usually have to build that asset up over time.

Many clients who do buy insurance could self-fund but would prefer to leave a legacy or spend the money on other things.

2. For clients who want insurance, she does a health reality check.

“I ask high-level medical questions, to determine the best product out there for them, as it might be hard to get approved,” Hyde said.

However, there are some products that can accommodate people with medical issues, and the medical questions determine which products will be the best fit.

3. She encourages clients to buy some inflation protection.

She often suggests that clients compromise by buying 3% simple inflation protection, rather than spending heavily on 5% compound annual inflation protection or doing without inflation protection altogether.

4. She sees buying inflation protection as a buffer against future premium increases.

“For those with traditional LTCI, this benefit can usually be removed or reduced later, giving you the option to reduce premiums should they go up,” Hyde said.

5. She supports clients’ efforts to self-fund long-term care risk.

One client is simply earmarking an investment account for care and noting in the financial plan that the account could be used for care, she said.

6. She talks about Roth IRAs.

A client who will be self-funding could use Roth conversions on a large IRA to convert a portion of dollars as early as possible, Hyde said.

Once the cash is in the Roth IRA, it can grow free of income taxes.

The Roth strategy “can help to avoid large tax bills later in life, should clients develop a need for expensive care and not have other tax-efficient funds to pay for them,” Hyde said.

7. She makes sure that clients think about all the angles.

In some cases, personal circumstances or state or local rules could affect what works.

In some states, for example, Medicaid programs count older people’s Roth IRA assets when deciding whether those people are eligible for nursing home benefits.

But in other states, including California, Florida, New York and Texas, the Medicaid nursing home benefits eligibility formula excludes Roth IRA assets.

Credit: iStock

Allison Bell

Think_Allison

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