You’re using your own retirement money — money you’ve already worked a lifetime to save — to pay for long-term care. But when tax season comes around,

you don’t owe a single penny in income tax on those withdrawals.

Sound impossible?

It’s not.

Thanks to a pair of little-known IRS rules — §7702B and §72(e)(11) — retirees can now reposition taxable retirement funds into tax-free long-term care benefits. Done correctly, this can cut a retiree’s tax liability on care expenses by up to 92%.

It’s one of the smartest, most underused moves in modern retirement planning. And the best part? You don’t need Congress’s approval, a trust or even new tax law to do it. It’s already written in the code.

The hidden tax bomb in retirement accounts

For decades, Americans were told to “save in your 401(k) or IRA — you’ll be in a lower tax bracket later.”

But for many retirees, that’s turned out to be a half-truth.

Between Required Minimum Distributions, or RMDs, Social Security taxation, Medicare IRMAA surcharges and inflation-driven income creep, a lot of retirees are paying more taxes in retirement than they did while working.

Now imagine adding long-term care expenses on top of that.

According to Genworth’s 2024 Cost of Care Survey, the average cost of a private nursing home room in the U.S. is now over $115,000 per year. Even home health care averages more than $6,000 per month.

If you pull those funds from your IRA or 401(k), you’re adding taxable income to your Adjusted Gross Income, or AGI — which can trigger higher taxes and higher Medicare premiums.

So how do you pay for care without lighting a tax fuse?

That’s where IRS §7702B and §72(e)(11) come in.

The tax-free loophole hiding in plain sight

Congress passed the Pension Protection Act of 2006 to help Americans prepare for long-term care without draining their savings.

Two key sections of the tax code were quietly updated:

• IRS §7702B: Defines tax-qualified long-term care insurance contracts and allows certain distributions to pay for LTC benefits tax-free.
• IRS §72(e)(11): Allows for tax-free withdrawals or policy exchanges from annuity contracts if the funds are used to pay for qualified long-term care expenses or premiums on tax-qualified LTC coverage.

In simple English:

If you reposition a portion of your IRA, 401(k), or nonqualified annuity into an approved long-term care or hybrid annuity, any future distributions used for qualified care can be tax-free or nearly tax-free.

You’re not avoiding taxes illegally — you’re following the IRS’s own rulebook.

How the strategy works (in plain English)

Here’s the process, step by step:

1. Start with a taxable account. This could be a traditional IRA, 401(k) or nonqualified annuity that’s been growing tax-deferred for years.
2. Reposition into a tax-qualified hybrid annuity or life insurance contract. These “combo” products are designed under IRS §7702B to provide long-term care benefits that qualify for tax-free treatment.
3. Trigger LTC benefits tax-free under §72(e)(11). When you eventually need long-term care, the withdrawals from this contract are considered reimbursements for qualified care — not taxable income.
4. Result: Nearly tax-free care coverage using pre-tax money. You’ve effectively transformed a taxable bucket into a nearly tax-free care fund — without paying taxes on the transfer or the distributions.

Think of it as the “Retirement Refinance” for long-term care. You’re not changing ownership — you’re changing the tax treatment.

Why this matters: The power of repositioning

The biggest threat to a retiree’s financial security isn’t always market loss — it’s unexpected income risk.

Every dollar pulled from an IRA increases AGI, which can:

• Make more of your Social Security taxable.
• Trigger IRMAA (Medicare premium surcharges).
• Reduce net investment income deductions.
• Push you into a higher federal bracket.

By repositioning taxable assets into tax-free LTC coverage, you’re essentially:

• Reducing your future taxable income.
• Shielding your Social Security from additional taxation.
• Lowering your Medicare premiums.
• Creating a tax-free pool for care when you need it most.

And unlike traditional “use-it-or-lose-it” LTC insurance, hybrid solutions ensure that if you never use the benefit, your heirs receive a tax-efficient death benefit instead.

A real-life example: Before versus after

Let’s meet Mark and Diane — retired teachers, both 68 years old, with a combined $450,000 in IRAs.

Their advisor estimated that if either one of them needed long-term care, they might have to withdraw $75,000 per year from their IRAs to cover costs.

Before repositioning:

• IRA withdrawal: $75,000
• Taxable income added: $75,000
• Marginal tax rate: 22%
• Federal taxes owed: $16,500
• New AGI: $150,000 — Triggered higher Medicare IRMAA brackets
• Total annual cost (tax + IRMAA): ~$18,000

After repositioning using IRS §7702B / §72(e)(11):

Mark and Diane repositioned $250,000 of their IRA into a tax-qualified LTC annuity.

Now, when they use that benefit:

• Long-term care withdrawals: $75,000
• Taxable income: $6,000 (only portion not qualified under the code)
• Effective tax savings: 92% tax-free
• New AGI: ~$81,000 (below IRMAA threshold)
• Total Annual Tax + IRMAA Savings: ~$10,500 per year

That’s over $50,000 in lifetime tax savings — just by using the IRS’s own rules.

The emotional side: Financial security meets dignity

Beyond the math, this strategy brings something far more important: peace of mind.

When families face long-term care needs, emotions run high. Spouses become caregivers. Children juggle work and medical coordination. Savings drain faster than anyone expected.

I’ve seen countless families struggle to decide whether to spend down investments or cash in retirement accounts just to pay for help. Every dollar spent came with a tax sting — and emotional guilt.

But when care is funded from a tax-free LTC plan, those decisions become simpler. The income is there. The taxes aren’t. And the family can focus on care — not costs.

Who should consider this strategy

This isn’t just for the ultra-wealthy. It’s for:

• Retirees age 55-75 with IRAs, 401(k)s or annuities they don’t plan to fully spend.
• Individuals who want LTC protection but dislike “use-it-or-lose-it” premiums.
• Couples who want to reduce taxable income and avoid IRMAA penalties.
• Anyone looking to pass assets efficiently to heirs — without the IRS taking a large share.

Final thought: The IRS won’t advertise it — But you can use it

Every retiree has two options:

1. Keep your money in taxable accounts and hope you never need care.
2. Use the IRS’s 92% tax-free rules to reposition part of it into a strategy that covers care — and keeps Uncle Sam out of your pocket.

The law is already written. The opportunity is already here.

The only question left is whether you’ll use it.

Because when the time comes, it’s not just about paying for care — it’s about protecting your dignity, your income and your legacy.

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.