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Maximize Lifetime Care Contracts with ROTH IRAs

This article is reproduced with permission from Spidell Publishing, Inc.

Planning ahead can yield large tax savings

Many retirement communities require large lump-sum fees when a retiree moves into the community. These fees are often referred to as “lifetime care contracts,” “founder’s fees,” or “life-care fees” and can be partly allocated to deductible medical expenses. In order to give rise to a medical expense deduction in the year a taxpayer moves into a retirement community, the agreement must require that the taxpayer pay a specific fee as a condition for the retirement community’s promise to provide lifetime care that includes medical care. Retirement communities often provide a statement to their new residents to prove how much of the lifetime care contract is allocable to medical care. The IRS accepts these statements as proof of the medical expense deduction. The statement must be based on either the home’s prior experience or on information from a comparable home.

Consider a Roth rollover

The upfront cost of moving into a retirement community can often reach into the high six figures. If even a fraction of these costs are allocable to a lifetime care contract, then the taxpayer will have very large medical expense deductions in the year they move into the retirement community.

If the taxpayer has modest income, they could be wasting a large medical expense deduction because unused medical expenses in one year do not carry over to another year. In situations like this, timing a Roth IRA rollover to coincide with the year of a retirement community move-in can provide large savings.

Example of Rollover

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