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Converting an IRA to a long-term care policy

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Converting an IRA to a long-term care policy

Dear Tax Talk:
I would like to know if I moved IRA money that has been invested in stocks and bonds to a Future Protector Plus Life/Long Term Care Policy, would I have to pay taxes on the money taken out of the stock market?


Dear Susan:
Generally, when you invest individual retirement account funds in nonqualified investments, the investment is treated as a distribution. Distributions are subject to tax and if paid before age 59½, they are subject to a 10-percent penalty.

Stock and bond funds are qualified IRA investments and so are certificates of deposit, money market accounts, etc. A life insurance policy is not a qualified investment.

A long-term care policy is an insurance contract that provides for the payment of expenses associated with the care for the elderly. For example, a long-term care policy can provide that it will pay up to $3,000 a month for an individual that needs in-home nursing care or needs to go into a nursing home. The payout is similar to the payout of an annuity, which is a permitted IRA investment. However, all IRAs are subject to
minimum distribution rules when the IRA owner turns age 70½. Which may be before the age that he or she needs nursing care.

That said, it might be possible that an insurer has developed an annuity policy that addresses long-term care needs while qualifying as a permitted IRA investment. You need to verify that the insurer is selling you a permitted IRA investment and that the amount you roll over into the long-term care policy is a permitted investment and won’t be treated as a distribution. Read all documents carefully and review them with an independent (not affiliated with the insurer) accountant or attorney.