Protecting retirement accounts during long-term care

Reviewed by the How To Help Your Elders editorial team | Updated March 2026

Your parent spent decades building retirement savings that were supposed to fund a comfortable old age, not get consumed by long-term care costs in a few years. This article explains which retirement accounts can be sheltered, how Medicaid treats different account types, and what strategies are still available depending on where your parent is in the process.

Long-Term Care Can Consume Forty Years of Savings in Two

Your parent spent decades building retirement savings. 401(k) contributions taken from every paycheck. IRA rollovers moved carefully from job to job. Investments selected thoughtfully and adjusted over time. That money represented security. The plan was that your parent would retire, live on Social Security and interest, and leave what's left to their kids.

Then your parent needs long-term care. Not a few weeks of physical therapy. Not a month in rehabilitation. Months or years of help with daily living: eating, bathing, dressing, toileting. According to the Genworth Cost of Care Survey, the national median cost for a private room in a nursing home exceeds $9,700 per month, or over $116,000 per year. Money that took forty years to accumulate can disappear in two to three years to pay for care.

This is the collision between what people plan for and what actually happens. Retirement accounts meant to fund a twenty-year retirement suddenly need to fund long-term care. And the rules about those accounts, required minimum distributions, early withdrawal penalties, tax implications, suddenly matter in ways they never did when everything was going according to plan.

The question most families ask: how do we protect this money? How do we keep long-term care costs from consuming all of the retirement savings? The honest answer is complicated. Some protection strategies are legal and legitimate. Some are the kind of planning that should have happened years ago, and it's too late now. Some strategies that families try are illegal or have unintended consequences.

How Retirement Accounts Are Treated by the Tax Code and Medicaid

Retirement accounts (401(k)s, IRAs, Roth IRAs, and similar accounts) are treated specially by both the tax code and Medicaid. The tax system created these accounts to encourage saving for retirement. The government gave tax breaks on money going in. It grows tax-free. Taxes are deferred until withdrawal.

Medicaid rules treat certain retirement accounts differently than other assets. Some retirement accounts are "exempt" assets, meaning Medicaid doesn't count them when determining eligibility. Some are "countable" assets that do count toward the asset limit. The rules vary significantly by state. In some states, an IRA that is in "payout status" (meaning the owner is taking regular distributions) is treated as income rather than as a countable asset. In other states, the full balance counts regardless of distributions.

According to the CFPB, one of the most common financial planning mistakes families make is assuming all retirement accounts are protected from Medicaid spend-down, when in reality the rules are state-specific and depend heavily on account type and distribution status.

Even if a retirement account is exempt for Medicaid purposes, your parent can still withdraw money from it. If they withdraw, they owe income tax on the withdrawal, and in some cases penalties. The money becomes available to pay for care, but the tax bill further depletes what's left.

This creates a tension. Your parent needs money to pay for care. Withdrawing from retirement accounts to pay for it creates tax consequences that further deplete the money. And required minimum distributions happen whether the money is needed or not, generating taxable income regardless.

Understanding Your Parent's Specific Accounts

Start by identifying all retirement accounts. Many people have multiple accounts from different employers or different times in their life. There might be a 401(k) from one job, another from a previous employer, a Roth IRA opened years ago, a Simple IRA or SEP-IRA from self-employment. Gather every statement you can find.

For each account, note the type, the current balance, whether distributions have already started, and who the designated beneficiaries are. Beneficiary designations are important. If your parent named someone as beneficiary of their retirement account, that's typically who gets the account when they die, regardless of what the will says.

Understand the distribution rules. According to the IRS, once your parent reaches age 73 (under current rules), they are required to take distributions each year from traditional IRAs, 401(k)s, and similar accounts. They are not required to take distributions from Roth IRAs during their lifetime. The required distribution amount is calculated based on the account balance and the IRS life expectancy tables. Missing an RMD triggers a penalty of 25 percent on the amount not withdrawn.

Figure out the tax situation. When your parent withdraws from a traditional IRA or 401(k), that withdrawal counts as ordinary income. It gets added to everything else they receive and they owe income tax on the total. A large withdrawal might push them into a higher tax bracket. It might also trigger taxation of their Social Security benefits or increase their Medicare premiums through IRMAA (Income-Related Monthly Adjustment Amount).

Check whether your parent took any protective steps earlier: long-term care insurance funded by retirement distributions, annuities with long-term care benefits, or trusts designed to protect retirement accounts.

What Can Actually Be Done Depending on Timing

The decisions available depend on where your parent is in the process.

If your parent is healthy now but might need long-term care in the future, there are real planning steps available. One option is to use retirement account distributions to purchase long-term care insurance. If your parent is still insurable and healthy enough to qualify, they can take distributions and use that money to buy a policy that would pay for care rather than depleting savings.

Another option is an annuity with long-term care benefits. Some insurance products combine retirement income with long-term care coverage. This is complex and not right for everyone, but for some people it works. A financial advisor who understands these products can help evaluate whether it makes sense.

Some people restructure how retirement accounts are organized. Moving money from a countable asset to an exempt asset can help with Medicaid planning. Setting up trust arrangements can affect how accounts are treated. But these strategies are state-specific and require professional guidance. If Medicaid is a possibility, consulting with an elder law attorney about how retirement accounts are structured is worth the investment. Doing this planning before care starts is much easier than trying to restructure things after.

If your parent is already receiving long-term care and needs to use retirement accounts to pay for it, the focus shifts to minimizing tax consequences. Work with a tax professional to understand what withdrawals would mean. In some cases, it makes sense to withdraw large amounts in a year when income is low, because the marginal tax rate will be lower. In other cases, it makes sense to take smaller amounts over time.

Think about whether other assets should be used first. If your parent has savings accounts, investment accounts, or other liquid assets not in retirement accounts, using those first might make sense because they don't have required distributions or the same tax consequences on withdrawal. Keeping retirement accounts intact as long as possible preserves their tax-preferred status.

If Medicaid qualification is a possibility, the timing and structure of retirement account distributions becomes very important. Medicaid has rules about transfers and spending that can be affected by how and when retirement accounts are accessed. This is complex enough to require professional guidance.

Finally, review the beneficiary designations on all retirement accounts. If your parent's situation has changed since those designations were set, they might want to update them.

The Window for Protection Closes Faster Than You Think

The reality is that most retirement savings can't be fully protected from long-term care costs without planning that should have happened years before care was needed. The strategies that work best, purchasing insurance, restructuring accounts, setting up trusts, are most effective when done well in advance.

What can be protected is knowledge and careful decision-making. You can educate yourself about the rules. You can work with professionals who understand the implications. You can make intentional choices about what to withdraw, when to withdraw, and how to minimize tax consequences. You can be strategic about the order in which different assets are used.

Long-term care is expensive, and retirement accounts that are meant to last a lifetime often don't last when long-term care enters the picture. That is not your parent's fault. That is a reality of current healthcare costs and how our system is structured. But understanding how it works and making good decisions can protect more of what your parent has and reduce unnecessary tax consequences.

Having a professional who understands retirement accounts, tax implications, and Medicaid rules involved in the decision-making process is worth the cost. It prevents expensive mistakes.

Frequently Asked Questions

Are retirement accounts protected from Medicaid?
It depends on your state and the type of account. In some states, an IRA or 401(k) that is in "payout status" (regular distributions being taken) is treated as income rather than a countable asset. In other states, the full balance counts toward Medicaid's asset limit. Roth IRAs are generally counted as assets. An elder law attorney in your state can tell you exactly how your parent's accounts will be treated.

Can I move money out of a retirement account to protect it from long-term care costs?
Moving money out of a retirement account triggers income tax on the withdrawal and may also create Medicaid look-back problems if done within five years of applying for Medicaid. There are legitimate restructuring strategies, but they need to be done with professional guidance to avoid penalties and unintended consequences.

What happens to a retirement account when my parent dies?
The account goes to whoever is named as the beneficiary, regardless of what the will says. Under the SECURE Act, most non-spouse beneficiaries must withdraw the entire inherited account within 10 years. Spouse beneficiaries can roll the account into their own IRA and delay distributions. Updating beneficiary designations to reflect current wishes is important.

Should my parent withdraw from retirement accounts or other savings first to pay for care?
Generally, using non-retirement liquid assets first preserves the tax-preferred status of retirement accounts. However, if your parent's retirement accounts are large enough that required minimum distributions create significant tax liability, it may make sense to draw them down strategically. A tax professional can model the best approach for your parent's specific situation.

Is it too late to buy long-term care insurance if my parent already needs care?
If your parent is already receiving long-term care, they almost certainly will not qualify for a traditional long-term care insurance policy. Insurers evaluate medical history and current health when issuing policies. The window for purchasing insurance is while your parent is still relatively healthy. Once care is needed, other strategies like Medicaid planning become the focus.

What is IRMAA, and why does it matter?
IRMAA stands for Income-Related Monthly Adjustment Amount. It is a surcharge on Medicare Part B and Part D premiums that applies when a beneficiary's modified adjusted gross income exceeds certain thresholds. Large retirement account withdrawals can push income above those thresholds, increasing Medicare costs two years later. This is an often-overlooked cost of retirement account distributions during care.