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How Does LTCI Bolster Your Retirement Plan?

Updated on November 13, 2014

Retirement plans give you substantial money after leaving the workplace when you are aged beyond 60. However, expenses for long term care can use up significant amounts of money from your retirement plan. Long term care is not something that can be ignored easily. According to the US Department of Health and Human Services, 3 in 4 senior citizens require some form of long term care.

You can still preserve a large portion of your retirement funds. The answer to this dilemma lies in long term care insurance. Insurance policies provide certain advantages that allow you to reduce expenses for care services. It is advisable to get insured than to pay through the money from your retirement plan.

If you have not considered planning for retirement yet, learn about these three types of retirement plans and the necessity of long term care insurance for them.

401(k)

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You probably wondered about the origin of the 401(k) plan’s name. This retirement plan derives its name from a specific part of the Tax Reform Act that was legislated in 1978. It refers to section 401, paragraph (k) in the Internal Revenue Code. The main aim of 401(k) is to encourage more Americans to invest in retirement funds while benefiting from tax advantages simultaneously.

401(k): One of the Most User-Friendly Retirement Plans

401(k) belongs to the class of retirement plans that are known as defined contribution plans. In these retirement plans, either the employer or the employee decides on the specific amount of contribution. In other words, you can choose the amount of money to be placed in the 401(k) plan and talk with your employer about it.

Generally, you can put 15% of your income to your personal 401(k) plan within a month. Just keep in mind that your employer can lower the percentage of money you put in your 401(k) account. Still, you can press for a higher percentage – especially if you have extra funds or a wage raise. Get the support of your co-workers and be patient when you propose it.

Under the right circumstances, your employer contributes a partial amount of the money that you provide for your 401(k) account. You can consider this as free money for your retirement plan. Through this method, employers can recruit skilled individuals and encourage their employees to perform well. They get another benefit from a 401(k) plan because it is less costly compared to other plans that involve fixed financial grants for retiring employees.

Your employer does not handle the funds in your 401(k) account. A third party does, and it allows you to decide on types of investments for your 401(k) plan. As an example, you can choose to invest your money in either a bond or a mutual fund. The 1974 Employment Retirement Income Security Act obliges the administration of 401(k) accounts under a third party. This legislation’s goal is to preserve your retirement funds in case your employer goes out of business.

An additional advantage with 401(k) is that a portion of your income goes directly to your retirement plan even before it undergoes taxation.

401(k) and Long Term Care Insurance

If you begin investing in a 401(k) plan by age 25, you can have as much as $1 million or more by the time you attain full retirement age. However, some people consider retirement plans later in their life or even forget them. The current costs of long term care services can significantly reduce the retirement funds in an average 401(k) plan.

According to Genworth Financial, the average annual cost of nursing facility stay in the US amounts to nearly $84,000. Care costs continue to increase. You also have to manage additional expenses for basic necessities, bills, and even tuition fees for your son or daughter in college. In addition, more than one family member might require long term care due to chronic illness or incapacitating injury.

To sustain long term care, you can withdraw money from your 401(k) plan. If you are aged below 60, you must pay for tax and a 10% penalty fee to the Internal Revenue Service.

By getting insured for long term care, you receive daily or monthly insurance payments to sustain care expenses. Many insurance policies are also tax-deductible. They also come with inflation protection so you can collect additional funds and boost your purchasing power.

Roth IRA

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Americans contribute money to an IRA, or individual retirement account, and benefit from it later in life. One type of IRA where you can invest your retirement funds is the Roth IRA. This retirement plan is named after former Senator William V. Roth, Jr. of Delaware, who supported the expansion of IRAs from their traditional roles. The term ‘Roth IRA’ first appeared in 1998.

Valuable Perks of Roth IRA

If there is one main idea to remember about Roth IRA, it is the absence of penalty when you withdraw money from a contribution to your Roth IRA. As a reminder, you have to maintain a Roth IRA for five years before you can withdraw. You can only take away money from your contributions – not your Roth IRA earnings. Still, you benefit from the absence of penalty.

As with the 401(k) plan, you have to attain the age of 60 in order to withdraw your Roth IRA earnings without subjection to penalty and taxation. The perk with Roth IRA is that this retirement plan provides some considerations. Regardless of age, you can use your contribution funds without tax and penalty if you go through disability or require a maximum of $10,000 to pay for an initial residence. You are also free from the 10% penalty fee for withdrawing sooner if the money sustains higher education.

With a traditional IRA, withdrawing money from your account becomes mandatory when you reach the age of 70. There is no such mandatory provision with your Roth IRA. Furthermore, you can keep on contributing funds for your Roth IRA by working beyond the full retirement age. A traditional IRA does not accept further contribution if you are past the age of 70. Remember – you can go on with contributing to your Roth IRA if you meet its requirements for eligibility.

How to Qualify for a Roth IRA

There are minor alterations in 2013’s income limit conditions for Roth IRA eligibility. If you and your spouse file together, you can only contribute partially if your modified adjusted gross income (MAGI) falls between $178,000 and $188,000. Partial contribution is also known as phase-out. The maximum range for last year was $183,000. As a couple, you become ineligible if your MAGI exceed $188,000.

If you and your spouse register separately, the MAGI amount for phase-out range from $1 to $9,999. You cannot qualify with a MAGI over $10,000. If you are single, the phase-out range is from $112,000 to $127,000. In 2012, the highest limit for phase-out was at $125,000. As with earlier conditions, you become ineligible if your MAGI is above $127,000.

If your MAGI falls behind the minimum boundary for phase out, you can place up to $5,000 – which is the maximum limit for contribution – to your Roth IRA account. The maximum limit for individuals aged 50 or above by this year’s end is $6,000. Income limit conditions for the following year can be subject to change.

Get Insured to Secure your Future

As with Roth IRA’s eligibility conditions, your personal situation is also prone to change. Even if you feel well today, an illness or disability can suddenly affect you in the future. Yes, you benefit from Roth IRA funds if you have a disability. If you cannot qualify for Roth IRA, you cannot take advantage of tax-free and penalty-free withdrawal of retirement funds. Long term care expenses can easily deplete your savings and other assets.

Your best option is to purchase a long term care insurance policy. Get a policy with inflation protection and tax deduction so you worry less about rising costs of care. In fact, tax deduction reserves a portion of your premiums for medical expenses.

SIMPLE IRA

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Another type of individual retirement account is the SIMPLE IRA. The acronym for SIMPLE IRA stands for Savings Incentive Match Plan for Employees. If you work under a small business, this is the most suitable kind of IRA for you. Under SIMPLE IRA terms, small business means a firm with a maximum of 100 employees who earn over $5,000. SIMPLE IRA also works well if you are self-employed.

SIMPLE IRA Offers Special Advantages

While a 401(k) plan gives you limited choices for investment, you have no limits for preferred investment with a SIMPLE IRA plan. With SIMPLE IRA, you can also access all mutual funds in the open market. Other retirement plans limit you up to a maximum of 20 options for mutual funds.

If you are a proprietor of a small business, SIMPLE IRA is the most affordable retirement plan that you can give to your employees. This type of IRA has fewer requirements for reporting compared to other retirement plans. For a business proprietor, fewer requirements mean less cost with retirement plan distribution.

Employees can make the most out of SIMPLE IRA because it obliges their employers to contribute funds to their retirement plan accounts. In other words, your employer must provide money to your SIMPLE IRA even if you have not contributed your part yet. Employers can give a dollar-for-dollar grant that is equal to or below than 3% of your salary, or 2% of your reimbursement. The specific kind and amount of contribution from an employer should apply equally to every employee in the small business.

For 2013, you can place up to $12,000 in your SIMPLE IRA. As you can see, the advantage with SIMPLE IRA is that it has higher maximum contribution than traditional or Roth IRAs. Be advised that some SIMPLE IRA plans can decrease the maximal limit of money you can contribute. You have the privilege for a catch-up contribution if you are aged 50 and above. The highest amount that you can put into your SIMPLE IRA as a catch-up contribution for this year equals to $2,500.

An additional benefit with SIMPLE IRA is that you make pre-tax contributions to your retirement plan account. This means every contribution to your SIMPLE IRA reduces your taxable income by $1.

Why is Long Term Care Insurance Still Necessary?

Even though a SIMPLE IRA plan gives you substantial funds after retirement, these funds might not be sufficient to cover the costs of long term care. Suppose that you receive care services from a home health aide with the average hourly rate of $20. Twelve hours of long term care amounts to $240. Within one month you incur around $7,200, which is also equivalent to $86,400 per year. Such cost can exhaust your retirement money from a SIMPLE IRA.

Long term care insurance covers not just home health aide services. It also pays for nursing facility care and assisted living as well. Insurance policies have helpful features like tax deduction. With tax deduction, your premiums become exempted from income tax. . With proper management of an insurance policy, you can safeguard a sizable part of your SIMPLE IRA funds for your post-retirement life.

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