A couple of weeks ago, we wrote a post answering a question we sometimes get about whether it’s wise to pull money from an individual retirement account (IRA) to help cover the cost of an entry fee at a CCRC or life plan retirement community. As explained in the post, in some cases, this can be a more costly move than people realize. In this post, we’ll follow up with a few additional considerations that could change the math a bit, including potential CCRC fee tax deductions.

Possible CCRC entry fee tax deductions

Under the current federal tax code, residents of some life plan communities (also referred to as continuing care retirement communities or “CCRCs”) may be entitled to a tax deduction on a fairly significant portion of their entry fee in year one, as well as their monthly fees on an ongoing basis. Why? Because a CCRC provides residents with a full continuum of care services (if needed), and in many cases, a portion of the entry fee and monthly fee may be considered a prepaid healthcare expense.

>> Learn more about potential CCRC entry fee tax deductions.

Using the same example as from the previous post, suppose a $300,000 withdrawal is taken from the IRA to help cover the entry fee. But this time, let’s also suppose that you qualify for a 30% tax deduction on the entry fee. And let’s suppose the entry fee is also $300,000. In this case, the 30% tax deduction would amount to $90,000. Therefore, the taxable amount of the withdrawal from the IRA — after the deduction — is $210,000 instead of $300,000. Since the entire withdrawal would have fallen in the 35% tax bracket, this amounts to a tax savings of around $31,500.

There are three other things to understand about the CCRC entry fee tax deduction:

  • It must be taken in the year you pay the entry fee. It cannot be spread out over multiple years.
  • You must itemize your taxes instead of taking the standard deduction. (You may find that the entry fee tax deduction makes it advantageous to itemize in that particular year, even if you normally take the standard deduction.)
  • It’s only available beyond 10% of your Adjusted Gross Income (AGI). Learn more here.

But wait, there’s more: potential tax deductions on CCRC monthly fees

If a tax deduction is allowable for the entry fee, it is also likely that a deduction is allowable for your monthly fees on an ongoing basis.

Suppose the monthly service fee is $4,500, and 30% of the fee is deductible. Over the course of a year, that comes to a total deduction of $16,200. Therefore, in year one, you can add this deduction to the $90,000 entry fee deduction. Now you would pay even less tax on the IRA withdrawal.

NOTE: The total number of monthly fees paid in the first year will depend on which month you moved in. Therefore, in this example, the total allowable deduction for the year would not be $16,200 if you lived there less than a full 12 months.

Keep in mind that unlike the entry fee tax deduction, the deduction on the monthly fees may be allowed year after year.

Using CCRC fee tax deductions for a Roth IRA conversion

There is another way the tax deduction on the entry fee could be leveraged for tax and retirement planning. Suppose you do not need to withdraw money from your IRA to cover the entry fee. Perhaps the proceeds from selling your home will cover it instead. However, the same tax deduction as described above is still available. You could either use the deduction to lower your taxable income, or you could potentially use it to offset the taxes due on a Roth IRA conversion, which could ultimately help save money for you and your heirs.

This blog post is not intended to be financial or tax advice as each person’s situation is different. Please consult with your personal tax advisor before making any decisions.

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