Lifestyle Paying for Senior Living: Retirement Accounts 1/31/2025 | By Annie Tobey Moving to a senior living community can involve significant financial expenditures. Some people making the move consider drawing from a retirement account in paying for senior living. In the third of our series, Seniors Guide looks at this option. A move into senior living typically requires initial fees as well as monthly expenses. If you’re considering paying for senior living with retirement accounts, you’ll need to determine what retirement accounts are available to you and what taxes and other penalties you may face. And, of course, you want to withdraw in a way that minimizes the cost. A changing financial landscape Used to be, the vision of moving into retirement entailed a retirement party at age 65, hosted by your decades-long employer. You stopped receiving a paycheck, but you began drawing your pension and Social Security. Those visions aren’t so simple anymore. While some people have retired before 65, others aren’t ready – either they want to continue working or feel they need to financially. In addition, fewer people have pensions and more have invested in a variety of different retirement accounts. Social Security payments don’t automatically began at age 65, either. The decision now depends upon when you were born and how much you want to receive. The Social Security Administration explains that the monthly retirement benefit will be higher if you delay the start date. On the other hand, people in and considering retirement need to be aware of RMDs, required minimum distributions. RMDs require you to take a minimum amount of money from a retirement account, such as a traditional IRA or 401(k) plan, after you turn 73 (and every year thereafter). Know your retirement funding options Most contemporary older adults have one of more of the following retirement accounts: traditional IRAs, Roth IRAs, 401(k)s, and pensions, including federal and state pension plans. Depending upon the account, you’ll need to consider What withdrawals are taxable? Can you withdraw a partial amount without incurring penalties or taxes? If so, how much? Is there a sliding scale of withdrawal amounts and tax percentages? If you have multiple accounts, you’ll probably want to withdraw from taxable retirement accounts first. Marriage can change RMDs and other considerations. Elias Papasavvas of Second Act Financial Services, which specializes in bridge loans for senior living, partnered with Hook Law, an elder law and financial planning firm, to create a rich overview of more than a dozen retirement account types. These accounts include the traditional IRA, Roth IRA, Simple IRA, 401(k), cash balance pension plan, traditional pension, annuities, thrift savings plans, and more. Get expert guidance in paying for senior living “As much as 70% of your hard-earned retirement funds can be eaten up by income, estate and state taxes,” says Ed Slott, retirement planning book author. With so much to know about the complex world of retirement accounts, working with an expert is a must. While many seniors hesitate to work with professional consultants because of the fees, “A few hours of time with a tax professional could save you a lot of money in unexpected tax consequences,” explains Papasavvas. “Large withdrawals typically trigger a large income tax bill – potentially at a higher tax rate. Higher income may also trigger a Medicare surcharge and capital gains taxes at a higher rate.” Papasavvas suggests eight essential questions to ask your financial advisor in determining the best course of action for you. Will a withdrawal from a retirement account take me into a higher tax bracket? If it does take me into a higher tax bracket, how much in additional income taxes am I likely to encounter? If I am in this higher tax bracket, do I face higher capital gains taxes if I sell securities during the year? Will more of my Social Security income also be taxable if I am in this higher tax bracket? Will additional Medicare taxes apply to me with this higher income bracket? Are there better ways to pay for my entry fee in my Life Plan Community or CCRC, than selling securities or withdrawing from retirement accounts? What penalties does the IRS levy when withdrawing from retirement accounts, or not withdrawing from retirement accounts? Can some of these taxes be offset by a deduction for the portion of my entry fee that may be tax deductible as a medical expense? Have I confirmed with my community what amount is tax deductible in the year I pay my entry fee? Whether through retirement fund withdrawal or another option that works for your financial situation, wise planning helps you begin a new life chapter with the assurance that you’ve taken the best steps forward. Our Paying for Senior Living Series: Sell Your Home Bridge Loans Read More Annie Tobey Annie Tobey has been a professional writer and editor for more than 30 years. As editor of BOOMER magazine, she explored a diversity of topics of particular interest to adult children of seniors. When she’s not writing, she can be found running the trails or enjoying a beer with friends.