Tax-Deferred to Tax-Free LTC — 1035 Exchange
PPA-Qualified Linked-Benefit Annuity: Distributions Used for LTC are Tax-Free and Can Be Leveraged
Tax-deferred annuities, as well as cash instruments like CDs and money market funds, often contain significant value on which their owners intend to rely during retirement. Since many people, especially if they live long enough, will need long-term care (LTC) for some period(s) of time, they will inevitably need to draw upon their cash or tax-deferred funds to pay for LTC.
The Pension Protection Act (PPA) of 2006 provides for 1035 exchanges of an existing tax-deferred annuity to a PPA-qualified annuity. The benefits of a PPA-qualified annuity could include: tax-free, guaranteed growth; tax-free distributions for LTC; distributions for income (usual taxation); payment of death benefit to heirs from un-used funds; leveraged LTC benefits.
The term “leveraged LTC benefits” means that that the annuity company pays some multiple (e.g., 2X or 3x) of the base account value for LTC if and when the base value is depleted. [Other annuities can be designed to provide a lifetime LTC benefit.]
Life insurance policies are also eligible for a 1035 exchange from a policy without linked LTC benefits to a policy offering LTC benefits.
Unfortunately, money in pre-tax tax-deferred annuities, such as IRA, 401(k), and 403(b) plans, is not available for the the 1035 exchange. Nevertheless, other solutions are available for leveraging money from pre-tax plans to tax-free LTC benefits.