Medical advancements have greatly improved our quality of health and have allowed us to live longer, extending our retirement years and related costs. Diligent savings combined with the many tools and resources available – such as individual retirement accounts (IRAs) and company-sponsored 401(k)’s, make it possible to protect today’s otherwise taxable earnings and save for our future. However, one very real and often overlooked threat to our hard-earned savings is the unexpected cost of long-term care and home health care. Are your IRA and 401(k) protected?

Many of us depend on the following for the security of our retirement savings:

  • Health Insurance
  • Social Security
  • Medicare
  • Personal savings

It’s important to realize that all of these do not ensure the protection of your hard-earned IRA and 401(k) savings from the potential costs of long-term care.  Hidden out-of-pocket costs for which can drastically impact these savings.

Our lifespan is now projected to extend up to 30+ years after retirement – 65 by traditional standards.

70% of us can anticipate needing some form of long-term care, according to the U.S Department of Health and Human Services.  As older models of retirement planning are based on a shorter life expectancy, we now must consider how long-term care costs–and the tax burden of IRA and 401(k) withdrawals–can deplete your savings quickly and ruthlessly.

Ready to benefit from the tax benefits of an IRA or 401(k)?

According to Genworth’s Cost of Care Survey, the projected annual cost for a senior living nursing home facility can easily reach $100,000/year, or over $8,000/month.

While this number should give most Americans a bit of anxiety, some still believe that they have nothing to fear if they have planned carefully with IRA and 401(k) savings. The catch is in the hidden details: taxes and penalties from taking funds out of your IRA and 401(k) sooner than your withdrawal schedule.  Paying for long-term care costs can quickly make your money disappear into thin air.

5 tips to avoid drawing funds from your IRA or 401(k) for long-term care costs.

1. Have a Plan

Avoid being overly confident about your control over the future of your health. In order to save money, many people skip planning for future long-term care costs, thinking: “I won’t need long-term care because my family will take care of me”, or, “IF something happens…my IRA and 401(k) is my insurance policy.”  This is a setup for potential disaster.

Certainly, we have control over making good lifestyle choices to maintain optimal health, but none of us truly has total control over the course of our health and aging. Furthermore, don’t be misled into thinking that losing your independent living is limited to the elderly–health issues may arise anytime and could require a period of long-term care even before retirement.

Did you know that sizable withdrawals from your IRA or 401(k) within a single year can double or triple your tax rate? In some cases, this also means penalty fees if you need this money before age 65. Poor planning can have shattering consequences. Read more information on the downsides of using your IRA or 401(k) to cover out-of-pocket health care costs.

2. Take Preventative Measures

Take advantage of preventive medical tests available to you through your health and life insurance policies.  Early detection of illness can make a life changing difference in treatment outcomes and maintaining independent living – both of which could have a direct impact on your IRA and 401(k) resources.

As you prepare to enroll in Medicare Part B (around age 65), make yourself aware of and plan to use preventative doctor visits that are covered with no copay for the first 12 months of enrollment. Read more information on what Medicare covers for preventative services.

3. Educate Yourself

Use resources online and in your community to educate yourself on the details of long-term care costs – it’s expensive! Learn everything you can about your entitlement to free and affordable Medicare and Medicaid health plans. Some are optional and require a premium with some copay, but these supplemental plans are far less expensive and could serve you well in saving money down the road.

While these plans do not cover long-term care costs, they will help protect your IRA and 401(k) by covering many other medical and prescription costs, including preventative and medical treatments:

  • Medicare (required)
  • Medicare Supplemental Insurance (optional/supplements Medicare enrollment)
  • Medicaid (for qualifying low-income only)
  • Medigap (optional/supplements Medicare)
  • Medicare Advantage plans (optional/supplements Medicare)

Make it a priority to be in close touch with these plans’ enrollment deadlines since they all differ, and missing their deadlines can have significant consequences on your access and coverage.  These plans can help protect you from having to draw funds from your IRA or 401(k) savings. Make a calendar to help you remember deadlines for when the time comes. Click to learn more about enrollment deadlines.

4. Consider Supplemental Insurance

In order to be truly well prepared for unexpected long-term care costs, look into a supplemental “back-up plan” that’s right for you. A private long-term care insurance policy covers much of what traditional health insurance does not, including: care coordination, home modification, adult day-care, assisted living facilities, and even nursing home care.

However, it is fairly expensive and there is no guarantee that your application will be accepted due to preexisting conditions. You’ll want to consult with an independent insurance broker while you’re still fairly healthy (ages 50-60) to determine if this option is right for you and your budget.

Fortunately, there is now a growing marketplace for more affordable supplemental alternatives that are well worth looking into as well:

  • Friends and Family Care
  • Short-term Care (Convalescent) insurance
  • Critical Care and Critical Illness insurance
  • Life Insurance with a LTC Rider
  • Annuities with Long-Term Care Riders
  • Deferred Annuities for after Retirement
  • Medical Savings Account

For more information on insurance alternatives, visit

5. Take Accountability

When you consider the reality of what needing long-term care means, think about the possibility that you may become quite disabled and unable to be accountable for making sound decisions. The responsibility often falls upon your family.

This could be in a variety of ways: tending to your daily care, taking on your financial burdens, and making difficult decisions related to everything from your medical care to the management of your personal finances. Having plans laid out in advance can offer peace of mind for everyone.

A living will (which can assign things like advance directives and power of attorney) is one of the ways to help the family protect you, and your IRA or 401(k), when you aren’t able to yourself. Click here to learn more information on drawing up legally binding online wills that circumvent expensive attorney fees.