Pay for long term care without paying taxes on an annuity withdrawal.
A tax break with an additional benefit. Did you know that, since taking effect in 2010, you are allowed to withdraw money from a certain kind of annuity without paying taxes as long as you use it to pay for qualified long term care coverage? A tax break for these important savings will be of interest to many thinking about the future, especially those in the highest tax bracket. This break originates from the Pension Protection Act of 2006.1
What is a LTC Hybrid? No, it’s not a car; though just as hybrid vehicles combine gasoline and electric power, an LTC Hybrid combines two functions within the same policy. A hybrid annuity is a non-qualified deferred annuity structured to provide either a long-term care benefit or a death benefit. It can be a less expensive alternative to a traditional LTC policy.1
Before the change in law, you could make a withdrawal from these hybrid annuities without facing penalties or surrender charges – but part of the withdrawal could be subject to tax. Since 2010, any withdrawal from such an annuity is income tax free if the money goes toward qualified long term care. For example, if the $100,000 you initially put into a hybrid annuity with an LTCI rider has grown to $250,000, you can pull the entire $250K out without a tax hit if that $250K will be used to pay for qualified LTC coverage. You wouldn’t even pay taxes on the $150,000 gain of the annuity.1,2
If you are simply withdrawing small amounts from a hybrid annuity annually to help pay for LTC, those tax-free withdrawals will be taken from the principal of the hybrid annuity and not the gain of the annuity. That is by law under the new tax treatment.1
Could an LTC hybrid prove useful to you? Are they suitable for your overall financial picture? You might want to contact your insurance or financial advisor to take a closer look at them and the potential tax break they could offer you.
Annuities are long-term investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10: IRS penalty tax and surrender charges may apply.
Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing. Guarantees are based on the claims paying ability of the issuing insurance company.
Life insurance policies contain exclusions, limitations, reductions of benefits, and terms for keeping them in force. Your financial professional can provide you with costs and complete details.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 – kitces.com/blog/is-the-ltc-cost-guarantee-of-todays-hybrid-lifeltc-or-annuityltc-insurance-policies-just-a-mirage/ [10/16/13]
2 – elderlawanswers.com/long-term-care-hybrid-products-give-buyers-more-options-7812 [3/21/14]
3 – ltcindiana.com/blog/long-term-care-insurance-or-lifeannuity-ltc-hybrid [5/24/13]