January 27, 2019
Every week, Simply Money’s Nathan Bachrach and Amy Wagner answer your financial questions in The Cincinnati Enquirer. If you, a friend, or someone in your family has a money issue or problem, please feel free to send those questions to firstname.lastname@example.org
Craig from Ludlow: Is a long-term care insurance policy really something I need?
Answer: According to AARP, once someone reaches age 65, there’s a 50-50 chance he or she will need long-term care. This includes things like a nursing home stay, assisted living, or any care that might be given at home. And these costs can start to add up: a 2017 report from the Bipartisan Policy Center found that someone who’s 65-years-old today will spend about $138,000 over their lifetime specifically on long-term care costs. And the kicker? Medicare doesn’t cover these expenses.
Enter a long-term care insurance policy. This type of insurance reimburses you a daily, set amount for help you may need with everyday activities, such as bathing, dressing, and/or eating. But premiums can be pricey – some estimates, according to USAToday, put the average at $2,400 each year. Plus, premiums usually get more expensive the older you get.
You may also run across a ‘hybrid’ option: a long-term care policy mixed with whole life insurance. But we caution against this type of policy. They can be much more expensive than traditional long-term care policies for the same exact same long-term care benefits.
If you decide to buy coverage, the ‘sweet spot’ for better rates is typically your mid-50s. Get quotes on a policy that would cover three to five years to see if it’s affordable.
If you can self-fund these potential long-term care expenses via savings and investments, then you don’t need a policy. But you need to know where you financially stand to make that decision. We suggest working with a fiduciary financial advisor who will look at your particular situation and make a suggestion that’s in your best interest.
Here’s The Simply Money Point: There’s a good chance that at some point during your retirement you’ll need some sort of long-term care. It’s a risk you should not ignore. But deciding how to mitigate that risk should be a part of a larger conversation with a trusted financial advisor.
Anna and Michael in Liberty Township: Our kids are 4 and 6 and we’re trying to save for their college expenses. Should we use a 529 plan or a Roth IRA?
Answer: Both a 529 plan and a Roth IRA have tax benefits that can help you pay for these future expenses. But as they say, the devil’s in the details.
Let’s start with a Roth IRA. You make contributions to this type of account with after-tax money and the account grows tax-free. You can take contributions out at any time, but you must hold the account for at least five years and be at least age 59 ½ to takeearnings out tax-free. You can contribute up to $6,000 this year (or, up to $7,000 if you’re age 50 or older), as long as you meet the income eligibility rules: in 2019 for married couples filing taxes jointly, the income limit starts phasing in at a modified adjusted gross income of $193,000.
A Roth IRA is not considered an ‘asset’ on the FAFSA (Free Application for Federal Student Aid) form since it’s a retirement account. However, once you withdraw money, it will be counted as ‘untaxed income’ – and the formula the FASFA uses to determine financial aid eligibility puts more weight on income than assets.
As for a 529 plan, contributions you make to this type of account grow tax-free. Withdrawals also come out tax-free when used for qualified education expenses. As Ohio residents, you can also get a state tax deduction on contributions.
There are no income limits for contributing to a 529 plan, and there are generally no annual contribution limits (there is, however, usually a lifetime contribution limit that varies by state). Another bonus is that the beneficiary of a 529 plan can be changed at any time.
Additionally, the FAFSA considers a 529 plan as part of parental assets which means it has minimal impact on the financial aid calculation.
The Simply Money Point is that both a Roth IRA and a 529 plan offer tax advantages. But, in most cases, a 529 plan is probably the better choice for something as specific as college costs.
Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Nathan Bachrach and his team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or email email@example.com.