In this article we outline thoughts and questions to consider with your tax and financial advisors if you are considering a withdrawal from your Roth IRA to pay for your Entry Fee in a CCRC or Life Plan Community.
Please note: While this page is not tax or financial advice, it is meant to give you a good baseline for a conversation with financial professionals who specialize in tax and retirement account management. A few hours of time with a tax or other licensed financial professional could save you a lot of money in unexpected tax consequences.
Roth IRA Overview
If you are thinking of ways to pay for your Entry Fee to a Life Plan Community or CCRC, you may be considering accessing the funds you have accumulated in a Roth IRA. Often, the year you move into a retirement community you may consider a larger than average withdrawal to cover your Entry Fees, Purchase, or Deposits. This may create more taxable income. Reviewing the below questions and thoughts with your financial advisor can help you get a head start to smart planning!
Do I have a Roth IRA?
You have a Roth IRA if (1) you opened the account as a Roth IRA and made contributions to it during your earning years or (2) converted a Traditional IRA or a Traditional 401(k) to a Roth IRA.
What kind of Contributions did I make into my Roth IRA?
All contributions to a Roth IRA are “after-tax” meaning you made them during your earning years and those contributions were not tax-deductible at the time you made them. As a result, withdrawals from a Roth IRA as well as all the earnings and gains within the account, are generally tax-free if they are considered qualified distributions (read more about qualified distributions below). Withdrawals from a Roth IRA are not required until after the death of the original owner.
Do I have to make withdrawals from my Roth IRA?
Withdrawals from a Roth IRA are not required until after the death of the original owner.
Things to consider when withdrawing funds from a Roth IRA
What portion of my withdrawal will be taxable?
Qualified distributions from a Roth IRA are tax-free and penalty-free. To be considered “Qualified” distributions the following criteria must be met:
(1) The owner of the account must have had the Roth IRA open for at least 5 tax years. The 5-year clock starts with your first contribution to any Roth IRA account. Please note each IRA-to-Roth IRA conversion has its own 5-year period so check with your tax and financial advisors on these details.
(2) The owner must be 59 1/2 years of age or older or permanently disabled.
What is the 10% penalty and how can I avoid it?
A 10% additional tax is applied if you withdraw or use Roth IRA assets before the 5-year period discussed above or before you reach age 59 ½, unless an exception applies. For example, unreimbursed medical expenses that exceed 7.5% of your adjusted gross income may be exempt from the tax. But if the distributions are deemed non-qualified, you are not only subject to the 10% tax but also income taxes on such distributions.
Can I take out a loan against my Roth IRA?
Borrowing money from a Roth IRA or using it as security for a loan are considered prohibited transactions that will result in additional tax.
Is there a limit to the amount I can withdraw annually from a Roth IRA?
There is not a limit to the amount you can withdraw from a Roth IRA. Although there is no official limit we strongly recommend you review how much to withdraw each year with your tax and/or financial advisors.
Eight questions to ask your tax or financial Advisors before withdrawing from your IRA account to pay for your Entry Fee:
1. What kind of an IRA account do I have?
2. What portion of my IRA is attributable to non-deductible/after-tax ir deductible/pre-tax contributions?
3. Will my withdrawals take me to a higher income tax bracket? How much can I withdraw from my IRA without going into a higher income tax bracket?
4. If I do go into a higher income tax bracket what is the likely:
(a) additional federal or state income tax?
(b) Medicare surcharge?
(c) additional portion of my social security income that could be taxed?
(d) higher capital gains taxes if I sell stock during the year because I am in a different tax bracket?
5. If I am under 59 ½, do any of the exceptions to the 10% penalty apply?
6. Does my community determine an annual ratio of medical expenses to total expenses that I can share with my accountant? If so, can I use this information to deduct a portion of my entrance fee and/or monthly fee from my income as a medical or other expense?
7. Can I take advantage of this deduction if I do not itemize and simply take the standard deduction? Or do I have to itemize and is it worth itemizing?
8. Do I have more tax-efficient ways to fund my move into my CCRC or Life Plan Community?
A Bridge Loan could be another financing option if withdrawals from retirement accounts are not recommended by your financial advisors.
If after consulting with your tax or financial advisor withdrawing from retirement accounts or selling your securities is not something you want to do, there are other funding options. Second Act provides a Home Equity Line of Credit that can act as a bridge loan to help you pay for your CCRC or Life Plan Community Entry Fees so you can move in first and have the time you need to list and sell your home for the best possible price.
With fast approval, competitive rates, and a special focus on serving seniors, we could help because we understand. Contact us today to learn more about how we can help you navigate your journey to a rewarding retirement.
Important Disclaimer
The information in this page is not meant to serve as financial, tax, or personal financial planning advice. No decisions should be made from reading the information on this page. Decisions should be made after careful analysis and consultation with your financial, tax, accounting, or other professional advisor licensed to provide retirement advice.
Second Act is a Division of Liberty Savings Bank, F.S.B. Member FDIC. Lending and loan services provided by Liberty Savings Bank, F.S.B. NMLS # 408905. Equal Housing Lender. All other services provided by Second Act Financial Services, LLC. This information is current as of 1/01/2023. Subject to credit and loan approval. Conditions and limitations apply. Information, rates and terms are subject to change without notice. © 2023 Second Act Financial Services, LLC. All Rights Reserved.
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