Qualified retirement plans (IRAs, 402(k)s, 403(b)s and the like) are a great way for families to be able to grow their wealth for the future and do so tax-deferred. There are numerous research articles that have proven that the tax deferral is extremely impactful when it comes to being able to accumulate wealth for a family.
Unfortunately, we often see clients who have spent their entire lives accumulating their retirement accounts but are now faced with the reality of long-term care costs. Families of those who are going or have gone into a nursing home quickly discover that retirement plans such IRAs, 401(k)s, 403(b)s are countable resources when it comes to long-term care and Medicaid planning. Although many states allow different ways to protect retirement plans, currently Pennsylvania is not one of them.
One of the more difficult conversations that we have to have with financial professionals who represent our clients is that when a loved one enters a nursing home the only way to be able to protect assets for the spouse or for the family is to liquidate a retirement account. Obviously, liquidation of a retirement account is not an ideal situation because not only will it trigger immediate tax consequences, but there are also other unintended consequences such as potential increases in Medicare premiums, etc.
Of all of the things that we do at Bellomo and Associates, the concept of a retirement plan and crisis planning is probably the most difficult and toughest conversation we need to have. It does not make logical sense to liquidate a retirement account and trigger tax consequences and other consequences that are unintended, but if a person will likely remain in a nursing home for an extended period of time, it is often the only way to preserve that asset to ensure that it is there for the spouse or loved ones.
When this conversation comes up, we often talk to the family and to the advisor about not making an emotional decision but rather a decision based on data. Certainly, there is no way to know how long a loved one will live in a nursing home, but depending on the diagnosis and prognosis for the person, we can often make an educated guess. If it is expected that the person will live for several months to several years, we often end up liquidating the retirement account because then we are able to protect either 100% of the assets for the spouse or 50% for the family members.
These calculations are done not only by our office but also by the accountants and financial advisors who work with our families. We are very lucky to work with many competent professionals, and often are able to take a very difficult conversation and make it simple. Although not ideal, preserving those assets for the family and for the future is often better than trying to save a few tax dollars in the short-term and losing it all in the long term.
If you or your family member is faced with this difficult decision, please contact your professionals immediately to help guide you through that conversation.
Jeffrey Bellomo
