Funding LTC from IRA

[artp]

Is there a way to fund LTC from an IRA account tax-free? Taxpayer has $150,000 in IRA and wants to purchase a whole life policy with LTC benefit. Plan would be to transfer the IRA to purchase 10-year annuity. Problem is taxpayer will get 1099-R each year from the annuity company showing $15,000 taxable. Anyone see a way to accomplish this without incurring income tax bite? Taxpayer is 62 so 10% penalty is not an issue.

[Max W]

There is no free lunch.  The tax was deferred on the contributions to the IRA and when the money us withdrawn, it becomes taxable.

Also, annuities come with a lot of downsides, high commissions, early withdrawal penalty, no beneficiaries.  The client should do some due diligence and not listen to an annuity sales persons, some of whom probably rank right up there with used car sellers.

[Lee B]

If your IRA is self directed there aren't a lot limitations as how your money can be invested.

However I am confused, is your client trying to buy an Annuity or trying to buy a Whole Life Policy with a LTC benefit?

Unless you are a Licensed Investment Advisor, I would tread very carefully.

[Max W]

I think the plan is to have the proceeds from the annuity used to pay for the insurance & LTC payments.  Since an annuity only pays 4 or 5 %, the client would have to withdraw part of the principle and for that there would be a penalty, usually starting at 8 or 9% the first year and declining 1% each year after.  I don't see how the insurance premiums could be funded for 10 years.

Annuities are usually sold by insurance companies, so in this case not only is the sales person getting a commission for the annuity, they are getting commissions on the sale of the insurance policies.

Anyone selling annuities has to be a licensed insurance agent.

I certainly would not give out any advice on the purchase of the annuity and insurance, but you can point out possible red flags to lookout for and to do due diligence.  I always preface my remarks with a caveat by saying that I do not give out insurance, or legal advice.

However, I would give out advice on any tax aspects of the plan.