July 20, 2011
A New Way To Pay Long Term Care Insurance Premiums – Tax Free!
As of January 1, 2010, there is a new way to pay your long term care premiums with tax-free withdrawals from Non-Qualified Annuities. The Pension Protection Act went into effect 1/1/2010 and provides yet another incentive from the government to encourage citizens to protect themselves against the devastating effects of a long term care situation.
Typical Funding Strategies For Long Term Care Insurance
I have many clients who have used funds from a dedicated investment to fund their long term care insurance premiums. The logic is certainly there in using this strategy. We work our whole lives to accumulate our nest egg which serves two primary purposes. First and foremost we save our whole lives so that we can have money to support our lifestyle. For many, this means we use the money to supplement our income and for such things as home improvements, travel, and spoiling grandkids. In other words, we save money so that some day we have the money to use for whatever we would like to use it for.
But secondly, we save for things we don’t want to spend money on but may have to because of an unexpected emergency. So our nest egg also represents “security.” Water heaters blow up, dental bills appear out of nowhere, and cars need repairs.
The greatest threat to our security is a long term care situation. Suddenly, the emergency changes from thousands of dollars to hundreds of thousands of dollars. So instead of using the entire nest egg to protect ourselves, why not take a small amount of the interest or dividends that the investments generate to fund long term care insurance? Up until now, the use of this money has typically been subject to taxation, but for some, there is a new tax-free option available.
Pension Protection Act And Tax-Free Withdrawals
Since January 1, 2010, you can take withdrawals from non-qualified annuities tax-free to pay long term care insurance premiums. Keep in mind that non-qualified means that it is an annuity that is not in a retirement fund like a 401k, 403B, IRA, or 457 plan. These retirement plans are what is referred to as “qualified money.” Non-qualified would be anything outside of these types of traditional retirement plans. This does open up some new funding options for many.
Deferred non-qualified annuities would allow you to put an amount of money in at a guaranteed interest rate which will grow tax-deferred. You can then use a partial 1035 exchange to pay your long term care insurance premiums from the account values tax-free. For most, that would be the equivalent of saving 30% off your premiums if you’re in a 30% tax bracket.