We don’t like to think about it, but the numbers don’t lie. According to Genworth’s 2023 Cost of Care Survey, the national average cost for a private room in a nursing home is now more than $108,000 per year. Home health aides and assisted living facilities aren’t much cheaper. For many retirees, the question isn’t if they’ll need care, but when.

The problem? Traditional retirement accounts like IRAs and 401(k)s were never designed with these kinds of expenses in mind. Withdrawals are taxable, and using pre-tax money to cover long-term care, or LTC, bills can trigger massive tax liabilities.

But here’s the good news: The IRS has quietly given retirees a way to fight back — if you know where to look.

The IRS rules most retirees don’t know about

Buried inside the tax code are two key provisions: Internal Revenue Code §7702B and IRC §72(e)(11). Together, they allow retirees to use qualified retirement funds — often tax-deferred dollars from IRAs, 401(k)s or annuities — to cover long-term care expenses tax-free.

Let’s break that down.

• IRC §7702B defines what counts as a tax-qualified long-term care insurance contract. These are specialized policies (sometimes standalone, sometimes built into annuities or life insurance) that meet federal requirements. Premiums for these contracts may be eligible for favorable tax treatment.
• IRC §72(e)(11) goes further, allowing withdrawals from certain annuities and life insurance policies to be used tax-free when applied to qualified long-term care expenses. In other words, the IRS recognizes the financial strain of care and provides an off-ramp to use your retirement dollars more efficiently.

For retirees staring down potential six-figure care costs, this isn’t just a technical footnote — it’s a financial lifeline.

Why this matters for your retirement

Think about it: If you withdraw $100,000 from a traditional IRA to pay for care, you may owe $20,000-$30,000 in federal and state income taxes. That means you’d need to withdraw closer to $130,000 just to cover the bill.

But if you funnel those same dollars into a tax-qualified long-term care solution, the IRS rules allow those funds to be used 100% tax-free. That’s like getting a 20%-30% discount on care costs overnight.

Even better, modern LTC solutions often come with built-in benefits:

• Flexibility: If you never need care, many policies provide a death benefit to your heirs.
• Leverage: Every dollar you reposition may translate into three or four dollars available for care.
• Protection: Your retirement accounts remain shielded from the “spend down” that devastates so many families.

The Pension Protection Act connection

You might be wondering: How does this fit with the broader retirement landscape? The Pension Protection Act of 2006 cemented the ability for retirees to reposition qualified money into hybrid long-term care contracts without triggering taxes.

That means an IRA or annuity you’ve been sitting on for years could be transformed into a tool that:

1. Provides tax-free long-term care coverage.
2. Preserves your legacy for children and grandchildren.
3. Turns a tax liability into a tax advantage.

A real-world example

Consider John and Mary, both age 68. They have $400,000 sitting in a traditional IRA. They’re healthy today, but Mary’s mother spent six years in an assisted living facility, and John’s father needed round-the-clock nursing home care. They know the odds aren’t in their favor.

Instead of waiting for the tax hit later, they reposition $150,000 of their IRA into a tax-qualified LTC annuity under §7702B and §72(e)(11). Here’s what happens:

• Their $150,000 immediately turns into $450,000 of long-term care coverage, available tax-free.
• If they never use the benefit, their children inherit the money.
• They’ve created a pool of tax-free dollars to handle one of retirement’s biggest unknowns.

John puts it best: “We bought peace of mind. Now we know our care won’t drain everything we’ve worked for.”

Why advisors often miss this strategy

Here’s the catch: Not every advisor talks about these IRS rules. Many stick to traditional investment advice and ignore the long-term care problem altogether. Others may not specialize in retirement income or insurance planning.

That’s why it’s important to work with someone who not only understands the market but also knows the tax code and how to use it to your advantage.

Final thoughts

Long-term care is one of the most significant threats to retirement security — and one of the least planned for. But thanks to IRS §7702B and §72(e)(11), retirees have a powerful, often overlooked strategy: turning taxable dollars into tax-free care coverage.

The rules are already on the books. The question is: Will you use them?

Don’t let an unexpected health event wipe out your life’s savings. With the right planning, you can protect your income, your legacy and your peace of mind.

Lyle Boss, The REAL BOSS Financial, endorsed by Glenn Beck as the premier retirement advisor for Utah and the Mountain West States. Boss Financial, 955 Chambers St. Suite 250, Ogden, UT 84403. Telephone: 801-475-9400.