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Moving into a retirement community can be a great way to improve your overall health care, reduce the stress of home ownership, and find new social activities and outlets. There are also a few tax breaks when moving into a retirement community to know about:
Selling a home has its own tax breaks that you can use to your advantage. Most households will not pay any capital gains on their home sale.
And this sale will leave you with a large source of money that you will be able to access for large expenses in retirement with little to no tax burden. A home sale may cause a large lump sum to be invested in a taxable brokerage account, which can have much different tax implications that you are used to with a 401(k) or IRA.
You’ll want to be comfortable with tax loss harvesting, understanding how capital gains are recognized and taxed, and how capital gains and interest can impact your Medicare premium due to the IRMAA surcharge.
Next, re-evaluate your withdrawal plan. You might have been taking money from a Roth IRA, a traditional IRA, or even a brokerage account to pay for ongoing living expenses. This move will likely change the amount of money you need from your retirement accounts, and which accounts make the most sense to withdraw from.
Increased withdrawals from your IRA can cause you to jump into a higher tax bracket. We help our clients find tax efficient withdrawal strategies while paying for retirement communities, and develop long term plans to keep your overall tax rates lower.
Finally, look at the tax deductions you can receive for medical care and costs. Depending on your retirement community, any upfront payment and part of your monthly payments may qualify you for added tax deductions due to medical expenses. These medical expense deductions can be available to you even if you move into independent living.
These one time and ongoing medical deductions can create very valuable tax planning opportunities. You may be able to create a Roth conversion strategy to take advantage of these deductions and save on your taxes. You may be able to sell appreciated stock and avoid significant capital gains. Or, you may be able to time a large one-time IRA withdrawal to fund other purchases, like a new car or family gifting for very little tax liability.
We have helped clients compare retirement communities (Here’s a series of articles we wrote for retirement communities local to us in Cedar Rapids, Iowa), create a plan for paying for a retirement community, navigate the complex tax opportunities around the medical expense deductions available, and manage investments for you so that you can enjoy your retirement!
Considering if a fiduciary, flat fee financial advisor is right for you? Schedule a free 30-minute meeting with us below to hear how we have helped other households just like yourself navigate this move: