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Can I use a 401k, IRA, or HSA to pay for long term care insurance?

Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted...

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella...

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UPDATED: Mar 19, 2020

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Paying for long term care insurance can be expensive, and although you may have money saved in a 401k, IRA, or HSA you may not be able to easily tap into it. You may not withdraw funds from a 401k or IRA penalty free in order to pay for long term care insurance.

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You may be able to use your HSA to pay for part of your long term care insurance, but only if the insurance is tax qualified. Other than that, you will need to pay for long term care insurance through other means, such as a traditional savings account or checking account.

Using a 401k to Pay for Long Term Care Insurance

A 401k is designed to help a person save money for retirement. With that notion in mind, it is not easy to withdraw money from your 401k until you actually reach retirement age. In order to deter you from taking your money prematurely you are subject to early withdrawal penalties.

In some select circumstances, you may be able to take money from your 401k without penalty. One such instance is if you need the money to purchase your first home. If you are buying a new home then you can take out a loan against your 401k, penalty free, and then pay the loan back on a monthly basis. The loan will have a standard interest rate, but the interest gets paid into your own account so you are basically paying yourself the interest. This is a great use of 401k funds, but it does not apply to long term care insurance.

To use your 401k to pay for long term care insurance, you will need to withdraw your funds. This will trigger an early withdrawal penalty fee of 10% or more, of the amount withdrawn. You will also be obligated to pay income tax on the amount you take out of your 401k.

For example, if you have $100,000 in your 401k and you want to take out $50,000 to help pay for long term care insurance, you will have to pay income tax on $50,000 plus a 10% penalty (in this case the penalty fee is $5,000). The income tax will be based on your total income bracket, so if your income bracket is 20%, then you will have to pay $10,000 income tax on this money. Out of the $50,000 you will have $35,000 remaining to use for your long term care insurance.

Once you withdraw funds from your 401k you have up to 60 days to reinvest it into another 401k or an IRA and remove the early withdrawal penalty. Unfortunately, if you are using the money to pay for long term care insurance then you probably will not have available funds to deposit this way in order to save yourself the 10% penalty fees.

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Using an IRA to Pay for Long Term Care Insurance

An IRA is an Investment Retirement Account and is very similar in rules and regulations to a 401k. Some employers have IRA savings options instead of 401k options, but anyone can deposit money into an IRA to receive a tax break on their current year income taxes as well as to save money for their retirement.

Once you have an IRA established, you will not be able to access the money prior to retirement without paying a 10% penalty for early withdrawal. The same rules as a 401k apply to an IRA, which means you can withdraw the funds prematurely without penalty only if you deposit the funds into another IRA or 401k within 60 days. If you need the funds from your IRA to pay for long term care insurance, you can withdraw it but you will have to pay income tax and early withdrawal fees if you are not of retirement age.

Using a HSA to Pay for Long Term Care Insurance

The HSA or Health Savings Account is a cross between a savings account and a health insurance plan. Health Savings Accounts are similar to Medical Savings Accounts and they function in a way where you deposit money each pay period into your health savings account to be used for qualifying medical expenses. The funds placed into a HSA can be withdrawn at any time provided the expenses are qualified as per the strict regulations of the plan.

Some long term care insurance is tax-qualified and may therefore be considered a qualifying medical expense for your HSA. If this is the case, you may be able to use money from your HSA to pay for your long term care insurance. In most cases, you will not be able to use all of the funds since the IRS governs how much money can be used based on the insured person’s age. However, it is an option that may help alleviate some of the financial burden of long term care insurance.

If you need long term care insurance, the best way to fund it is to shop around for the best rates and find an affordable plan. It is best not to tap into a 401k or IRA prematurely if it is not absolutely necessary. An HSA may help pay for some of the costs, but you still need to find a plan that falls within an appropriate budget for your situation.

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