Major Health or Care Event: Rebuilding the Liquidity Plan

A serious health or care event changes the financial picture quickly. Whether you are planning for yourself or helping a family member, the core task is the same: build a realistic picture of what care will cost, identify the most tax-efficient way to fund it, and preserve flexibility for as long as possible.

What is the recommended order for drawing down assets during a care event?

The general principle is to draw from taxable accounts first, tax-deferred accounts second, and Roth accounts last. This order preserves the longest possible tax-free growth and avoids triggering avoidable taxes at a time when expenses are already high.

• Taxable brokerage accounts first. Selling appreciated assets here may trigger capital gains taxes, but the gain is typically taxed at lower long-term rates. Assets held until death receive a stepped-up cost basis, so selling during life rather than inheriting through an estate can be a deliberate choice, not just a default.
• Traditional IRA or 401(k) second. Withdrawals are taxed as ordinary income. Large withdrawals can push you into higher brackets or affect Medicare premium calculations (IRMAA surcharges). Coordinate with a tax professional on the size and timing of withdrawals.
• Roth IRA last. Qualified Roth distributions are tax-free and there are no required minimum distributions during the owner's lifetime. Roth accounts also pass to heirs more favorably than traditional accounts. Exhaust other sources before touching Roth balances.

Home equity is not listed above because liquidating it (through a reverse mortgage or sale) is a major, often irreversible decision that involves housing, estate, and Medicaid implications simultaneously. Treat it separately from portfolio drawdown and involve professionals before proceeding.

How does long-term care insurance fit into the plan?

Long-term care (LTC) insurance is designed to cover expenses that health insurance and Medicare typically do not: extended stays in nursing facilities, assisted living, and ongoing home health aide services.

If you or a family member already holds an LTC policy, the first step is to understand the benefit triggers, elimination period, daily or monthly benefit limit, and inflation protection rider. Many people pay premiums for years and are unclear on the exact conditions required to begin collecting benefits.

For those evaluating LTC insurance for the first time, the key considerations are:

• Age and health at purchase. Premiums are significantly lower when purchased in your 50s or early 60s. Coverage may be denied or priced out of reach after a health event has already occurred.
• Inflation protection. Care costs rise over time. A policy without a compound inflation rider may cover a fraction of actual costs by the time benefits are needed.
• Hybrid products. Life insurance policies and annuities with long-term care riders allow unused benefits to pass to heirs as a death benefit, addressing the "I may never use it" concern with traditional LTC insurance. They typically require a lump-sum or large periodic premium.

When does Medicaid become relevant and how does it work with retirement assets?

Medicaid is a joint federal and state program that covers long-term care costs for individuals who meet financial eligibility requirements. The rules vary significantly by state. In general, Medicaid requires that applicants have countable assets below a certain threshold (often around $2,000 for an individual, though protections apply for a spouse remaining at home).

Retirement accounts such as traditional IRAs and 401(k) plans are treated differently depending on the state. In some states, an IRA in payout status is counted as income rather than an asset; in others, the full balance is counted as an available resource.

Two Medicaid rules to understand before any planning begins:

• The 5-year look-back period. Medicaid reviews transfers made within 60 months of application. Transfers for less than fair market value during this window result in a penalty period during which Medicaid benefits are withheld. This rule makes last-minute asset transfers an unreliable strategy.
• Spousal protections. A community spouse (the spouse remaining at home) is generally allowed to keep a portion of the couple's assets and income. These rules are complex and state-specific.

Medicaid planning is a specialty within elder law. Consult an elder law attorney before making any asset transfers or structural changes intended to qualify for Medicaid benefits.

Frequently Asked Questions