Self-Funding Long-Term Care? That Could Be a Big Mistake

# Self-Funding Long-Term Care With Your IRA Could Trigger a Tax Trap

Withdrawing money from your IRA to pay for long-term care sounds straightforward. It's your money, after all. But this approach creates a hidden financial problem that catches many retirees off guard: the withdrawal triggers taxable income that ripples through your entire financial picture.

Here's how the damage unfolds. When you withdraw from a traditional IRA, that money counts as ordinary income for the year. If you're 65 or older and covered by Medicare, this income bump matters enormously. Your Modified Adjusted Gross Income (MAGI) determines your Medicare Part B and Part D premiums through a system called Income-Related Monthly Adjustment Amounts (IRMAA).

Cross certain thresholds, and your Medicare premiums jump dramatically. For 2024, a single filer with MAGI between $103,000 and $129,000 pays standard Part B premiums. But surpass $206,000 to $231,000, and your Part B premium nearly triples to $429.80 per month. Part D drug coverage premiums climb even more steeply. A couple filing jointly hits similar cliffs at higher income levels.

An example makes this concrete. Suppose you need $50,000 for long-term care this year. You withdraw $50,000 from your traditional IRA. That $50,000 becomes taxable income. If your other income already put you near an IRMAA threshold, this single withdrawal could push you over the edge, locking you into higher Medicare premiums for the rest of that benefit year and the next.

The tax bill extends beyond Medicare. That extra $50,000 in income also increases your federal income tax liability, potentially pushes you into a higher tax bracket, and may trigger the 3.8% Net Investment Income Tax if you have substantial investment income. State income taxes rise too, depending on where you live.

Long-term care costs are steep. The median cost for assisted living runs $4,500 per month nationally, according to industry data. A one-year stay could easily require $50,000 to $70,000 or more. For those receiving Medicare already, large IRA withdrawals become an expensive way to fund that care.

Better alternatives exist. Long-term care insurance, purchased earlier in retirement or even before, shields your income and assets. Some life insurance policies and annuities now offer long-term care riders, bundling both benefits into one product. Medicaid planning, done properly with a elder law attorney, can help you protect assets while qualifying for coverage. Some people self-insure through disciplined savings in taxable accounts separate from IRAs.

If you do need to access retirement funds for care, Roth IRAs avoid the tax trap since qualified withdrawals aren't taxable. Roth conversions done years before you need the money offer more control. Withdrawing from taxable brokerage accounts avoids triggering IRMAA adjustments entirely, though these accounts offer no special tax advantages like IRAs do.

The takeaway for anyone over 60 with an IRA: plan for long-term care before a crisis forces a reactive IRA withdrawal. That single decision can cost you thousands in extra Medicare premiums and taxes over the next few years. Speaking with a tax professional or elder law specialist before withdrawing large sums protects both your retirement income and your healthcare costs.