New Ways to Plan for Long-Term Care Costs: Self-Insure & Medicaid Trusts

By Michael Ruger, CFP®
Partner and Chief Investment Officer at Greenbush Financial Group

Planning for long-term care has always been one of the most challenging aspects of a retirement plan. For decades, the go-to solution was purchasing long-term care insurance. But as we move into 2025, this option is becoming less viable for many families due to skyrocketing premiums and shrinking availability associated with long-term care insurance. For example, in New York, there is now only one insurance company still offering new long-term care insurance policies. Carriers are exiting the market because the probability of policies paying out is high, and the dollar amounts associated with these claims can easily be in excess of $100,000 per year.

So where does that leave retirees and their families? Fortunately, there are two primary strategies that have emerged as alternatives:

• Self-insuring by setting aside a dedicated pool of assets for potential care.

• Using Irrevocable or Medicaid trusts to protect assets and plan for Medicaid eligibility.

In this article, we’ll break down each approach, their pros and cons, and what you should consider when deciding which path makes sense for you.

The Self-Insurance Strategy

Self-insuring means you create a separate “bucket” of assets earmarked specifically for long-term care needs. Instead of paying tens or even hundreds of thousands of dollars in premiums over the years for the long-term insurance coverage, those funds stay in your name. If a long-term care event never occurs, those assets simply pass on to your beneficiaries.

The benefits:

• Flexibility—you decide how, when, and where care is provided.

• Assets remain under your control and stay in your estate.

• Avoid the risk of paying for insurance you never use.

The challenges:

• You need significant extra assets, beyond what you already need to meet your retirement income goals.

• Costs can be substantial—long-term care can run $120,000 to $200,000 per year, depending on location and type of care.

Self-insuring works best for those who have enough wealth to comfortably dedicate a portion of their portfolio to this potential risk without jeopardizing their retirement lifestyle.

The Trust Approach

For individuals or couples without the level of assets needed to fully self-insure, the next common strategy is using Irrevocable trusts (often called Medicaid trusts). These trusts are designed to protect non-retirement assets so that if you need long-term care in the future, you may qualify for Medicaid without having to spend down all your savings.

How it works:

• Assets placed into an irrevocable trust are no longer counted as yours for Medicaid eligibility purposes.

• If structured properly and far enough in advance, this can preserve assets for heirs while ensuring that Medicaid can help cover long-term care.

Important considerations:

• There is typically a five-year look-back period in most states. If assets aren’t in the trust at least five years before applying for Medicaid, the strategy can fail.

• Medicaid doesn’t cover everything. For example, around-the-clock home health care often isn’t fully covered, which limits flexibility.

The trust strategy is most effective for individuals who wish to protect their assets but recognize that care options may be limited to facilities and providers that accept Medicaid.

Which Approach is Right for You?

Ultimately, the choice between self-insuring and using a trust comes down to your financial position and your preferences for future care.

• If you value flexibility and have the assets, self-insuring is often the preferred option.

• If resources are more limited, a trust strategy can provide asset protection and access to Medicaid, even though it may reduce your care options.

The Key Takeaway: Plan Ahead

Whether you choose to self-insure, set up a trust, or use a combination of both, the most important factor is timing. These strategies require proactive planning—often years in advance. With costs continuing to rise and traditional long-term care insurance becoming less accessible, exploring these new approaches early can help protect both your assets and your peace of mind.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions (FAQs)

Why is traditional long-term care insurance becoming less viable?
Long-term care insurance has become less practical due to rising premiums, stricter underwriting, and fewer insurers offering new policies. Many carriers have exited the market because claim payouts are large and frequent, making policies increasingly expensive for consumers.

What does it mean to self-insure for long-term care?
Self-insuring means setting aside a dedicated portion of your assets to cover potential long-term care expenses instead of paying insurance premiums. This approach offers flexibility and keeps assets under your control but requires sufficient wealth to handle potentially high annual costs.

Who is best suited for a self-insurance strategy?
Self-insuring typically works best for individuals or couples with substantial savings beyond what’s needed for retirement income. Those with enough assets can earmark funds for potential care without endangering their financial security or lifestyle.

What is a Medicaid or irrevocable trust, and how does it help with long-term care planning?
An irrevocable or Medicaid trust allows individuals to transfer assets out of their name, potentially helping them qualify for Medicaid coverage without depleting all their savings. If created properly and early enough, it can preserve wealth for heirs while enabling access to Medicaid-funded care.

What are the limitations of using a trust for long-term care planning?
Medicaid trusts must be established at least five years before applying for benefits to meet look-back rules. Additionally, Medicaid may not cover all types of care, such as full-time home assistance, which can limit personal choice and flexibility.

When should you start planning for long-term care needs?
It’s best to plan well in advance—ideally several years before care is needed. Early planning allows time to build assets for self-insuring or to structure a trust properly for Medicaid eligibility, reducing financial and emotional stress later.

If You Retire With $1 Million, How Long Will It Last?

By Michael Ruger, CFP®
Partner and Chief Investment Officer at Greenbush Financial Group

Retirement planning often circles around one big question: If I save $1 million, how long will it last once I stop working? The answer isn’t one-size-fits-all. It depends on a handful of key factors, including:

• Your annual withdrawal rate

• Inflation (the rising cost of goods and services over time)

• Your assumed investment rate of return

• Taxes (especially if most of your money is in pre-tax retirement accounts)

In this article, we’ll walk through each of these factors and then run the numbers on a few different scenarios. By the end, you’ll have a much clearer idea of how far $1 million can take you in retirement.

Step 1: Determining Your Withdrawal Rate

Your withdrawal rate is simply the amount of money you’ll need to take from your retirement accounts each year to cover living expenses. Everyone’s number looks different:

• Some retirees might only need $60,000 per year after tax.

• Others might need $90,000 per year after tax.

The key is to determine your annual expenses first. Then consider:

• Other income sources (Social Security, pensions, part-time work, rental income, etc.)

• Tax impact (if pulling from pre-tax accounts, you’ll need to withdraw more than your net spending need to cover taxes).

For example, if you need $70,000 in after-tax spending money, you might need to withdraw closer to $75,000–$90,000 per year from your 401(k) or IRA to account for taxes.

Step 2: Don’t Forget About Inflation

Inflation is the silent eroder of retirement plans. Even if you’re comfortable living on $70,000 today, that number won’t stay static. If we assume a 3% inflation rate, here’s how that changes over time:

• At age 65: $70,000

• At age 80: $109,000

• At age 90: $147,000

Expenses like healthcare, insurance, and groceries tend to rise faster than other categories, so it’s critical to build inflation adjustments into your plan.

Step 3: The Assumed Rate of Return

Once you retire, you move from accumulation mode (saving and investing) to distribution mode (spending down your assets). This shift raises important questions about asset allocation.

• During accumulation years, you weren’t withdrawing, so market dips didn’t permanently hurt your portfolio.

• In retirement, selling investments during downturns locks in losses, making it harder for your account to recover.

That’s why most retirees take at least one or two “step-downs” in portfolio risk when they stop working.

For most clients, a reasonable retirement assumption is 4%–6% annual returns, depending on risk tolerance.

Step 4: The Impact of Taxes

Taxes can make a significant difference in how long your retirement savings last.

• If most of your money is in pre-tax accounts (401k, traditional IRA), you’ll need to gross up withdrawals to cover taxes.

• Example: If you need $80,000 after tax, and your tax bill is $10,000, you’ll really need to withdraw $90,000 from your retirement accounts.

Now, if you have Social Security income or other sources, that reduces how much you need to pull from your investments.

Example:

• Annual after-tax expenses: $80,000

• Grossed-up for taxes: $90,000

• Social Security provides: $30,000

• Net needed from retirement accounts: $60,000 (indexed annually for inflation)

Scenarios: How Long Does $1 Million Last?

Now let’s put the numbers into action. Below are four scenarios that show how long a $1 million retirement portfolio lasts under different withdrawal rates. Each assumes:

• Retirement age: 65

• Beginning balance: $1,000,000

• Inflation: 3% annually

• Investment return: 5% annually

Scenario 1: Withdrawal Rate $40,000 Per Year

Assumptions:

• Annual withdrawal: $40,000 (indexed for 3% inflation)

• Rate of return: 5%

Result: Portfolio lasts 36 years (until age 100).

Why not forever? Because inflation steadily raises the withdrawal amount. At age 80, withdrawals rise to $62,000/year. By age 90, they reach $83,000/year.

Math Note: For the duration math, while age 90 minus age 65 would be 35 years.  We are also counting the first year age 65 all the way through age 90, which is technically 36 years. (Same for all scenarios below)

Scenario 2: Withdrawal Rate $50,000 Per Year

Assumptions:

• Annual withdrawal: $50,000 (indexed for 3% inflation)

• Rate of return: 5%

Result: Portfolio lasts 26 years (until age 90).

By age 80, withdrawals grow to $77,000/year. By age 90, they reach $104,000/year.

Scenario 3: Withdrawal Rate $60,000 Per Year

Assumptions:

• Annual withdrawal: $60,000 (indexed for 3% inflation)

• Rate of return: 5%

Result: Portfolio lasts 21 years (until age 85).

Scenario 4: Withdrawal Rate $80,000 Per Year

Assumptions:

• Annual withdrawal: $80,000 (indexed for 3% inflation)

• Rate of return: 5%

Result: Portfolio lasts 15 years (until age 79).

Even if you bump the return to 6%, it only extends one more year to age 80. Higher withdrawals create a significant risk of outliving your money.

Final Thoughts

If you retire with $1 million, the answer to “How long will it last?” depends heavily on your withdrawal rate, inflation, taxes, and investment returns. A $40,000 withdrawal rate can potentially last through age 100, while a more aggressive $80,000 withdrawal rate may deplete funds before age 80.

The bottom line: Everyone’s situation is unique. Your lifestyle, income sources, tax situation, and risk tolerance will shape your plan. This is why working with a financial advisor is so important — to stress-test your retirement under different scenarios and give you peace of mind that your money will last as long as you do.

For more information on our fee based financial planning services to run  your custom retirement projections, please visit our website.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions (FAQs)

What is a safe withdrawal rate in retirement?
A commonly used guideline is the 4% rule, meaning you withdraw 4% of your starting balance each year, adjusted for inflation. However, personal factors—such as market performance, expenses, and longevity—should guide your specific rate.

How does inflation affect retirement spending?
Inflation steadily increases the cost of living, which raises how much you need to withdraw each year. At a 3% inflation rate, an annual $70,000 expense today could grow to over $100,000 within 15 years, reducing how long savings can last.

Why do investment returns matter so much in retirement?
Once you start taking withdrawals, poor market performance can have a lasting impact because you’re selling investments during downturns.

How do taxes impact retirement withdrawals?
Withdrawals from pre-tax accounts like traditional IRAs and 401(k)s are taxable, so you may need to take out more than your net spending needs. For instance, needing $80,000 after tax could require withdrawing around $90,000 or more before tax.

What can help make retirement savings last longer?
Strategies like moderating withdrawal rates, maintaining some stock exposure for growth, and factoring in Social Security or pension income can extend portfolio longevity. Regularly reviewing your plan helps ensure it stays aligned with your goals and spending needs.

The Risk of Outliving Your Retirement Savings

By Michael Ruger, CFP®
Partner and Chief Investment Officer at Greenbush Financial Group

When you imagine retirement, perhaps you see time with family, travel, golf, and more time for your hobbies. What many don’t realize is how two forces—longer lifespans and rising costs—can quietly erode your nest egg while you're still enjoying those moments. Living longer is a blessing, but it means your savings must stretch further. And inflation, especially for healthcare and long-term care, can quietly chip away at your financial comfort over the years. Let’s explore how these factors shape your retirement picture—and what you can do about it.

What you’ll learn in this article:

• How life expectancy is evolving, and how it’s increasing the need for more retirement savings

• The impact of inflation on a retiree's expenses over the long term

• How inflation on specific items like healthcare and long-term care are running at much higher rates than the general rate of inflation

• How retirees can test their retirement projections to ensure that they are properly accounting for inflation and life expectancy

• How pensions can be both a blessing and a curse

1. Living Longer: A Good But Bad Thing

The Social Security life tables estimate that a 65-year-old male in 2025 is expected to live another 21.6 years (reaching about age 86.6), while a 65-year-old female can expect about 24.1 more years, extending to around 89.1 (ssa.gov).

That has consequences:

• If a retiree spends $60,000 per year, a male might need 21.6 × $60,000 = $1,296,000 in total

• A female might need 24.1 × $60,000 = $1,446,000
  These totals—before considering inflation—highlight how long-term retirement can quickly become a multi-million-dollar endeavor.

2. Inflation: The Silent Retirement Thief

Inflation steadily erodes the real value of money. Over the past 20 years, average annual inflation has held near 3%. Let’s model how inflation reshapes $60,000 in annual after-tax expenses for a 65 year-old retiree over time with a 3% annual increase:

• At age 80 (15 years after retirement):
  $60,000 × (1.03)^15 ≈ $93,068 per year

• At age 90 (25 years after retirement):
  $60,000 × (1.03)^25 ≈ $127,278 per year

In just the first 15 years, this retiree’s annual expenses increased by $33,068 per year, a 55% increase. 

3. The Hidden Risk of Relying Too Much on Pensions

One of the most common places retirees feel this pinch is with pensions. Most pensions provide a fixed monthly amount that does not rise meaningfully with inflation. That can create a false sense of security in the early years of retirement.

Example:

• A married couple has after-tax expenses of 70,000 per year.

• They receive $50,000 from pensions and $30,000 from Social Security.

• At retirement, their $80,000 of income in enough to meet their $70,000 in after-tax annual expenses.

Here’s the problem:

• The $50,000 pension payment will not increase.

• Their expenses, however, will rise with inflation. After 15 years at 3% inflation, those same expenses could total about $109,000 per year.

By then, their combined pension and Social Security will fall well short, forcing them to dip heavily into savings—or cut back their lifestyle.

This illustrates why failing to account for inflation often means retirees “feel fine” at first, only to face an unexpected shortfall 10–15 years later.

4. Healthcare & Long-term Care Expenses

While the general rise in expenses by 3% per year would seem challenging enough, there are two categories of expenses that have been rising by much more than 3% per year for the past decade: healthcare and long-term care.  Since healthcare often becomes a large expense for individuals 65 year of age and older, it’s created additional pressure on the retirement funding gap.

• Prescription drugs shot up nearly 40% over the past decade, outpacing overall inflation (~32.5%) (nypost.com).

• Overall healthcare spending jumped 7.5% from 2022 to 2023, reaching $4.9 trillion—well above historical averages (healthsystemtracker.org).

• In-home long-term care is also hefty—median rates for a home health aide have skyrocketed, with 24-hour care nearing $290,000 annually in some cases (wsj.com).

5. The Solution: Projections That Embrace Uncertainty

When retirement may stretch 20+ years, and inflation isn’t uniform across expense categories, guessing leads to risk. A projection-driven strategy helps you:

• Model life expectancy: living until age 85 – 95 (depending on family longevity)

• Incorporate general inflation (3%) on your expenses within your retirement projections

• Determine if you have enough assets to retire comfortably

Whether your plan shows a wide cushion or flags a potential shortfall, you’ll make confident decisions—about savings, investments, expense reduction, or part-time work—instead of crossing your fingers.

6. Working with a Fee-Based Financial Planner Can Help

Here’s the bottom line: Living longer is wonderful, but it demands more planning in the retirement years as inflation, taxes, life expectancy, and long-term care risks continue to create larger funding gaps for retirees. 

A fee-based financial planner can help you run personalized retirement projections, taking these variables into account—so you retire with confidence. And if the real world turns out kinder than your model, that's a bonus. If you would like to learn more about our fee-based retirement planning services, please feel free to visit our website at: Greenbush Financial Group – Financial Planning.

Learn more about our financial planning services here.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions (FAQs)

How does longer life expectancy affect retirement planning?
People are living well into their 80s and 90s, meaning retirement savings must cover 20–30 years or more. The longer you live, the more years your portfolio must fund, increasing the importance of conservative withdrawal rates and sustainable planning.

Why is inflation such a big risk for retirees?
Inflation steadily raises the cost of living, reducing the purchasing power of fixed income sources like pensions. Even at a modest 3% inflation rate, living expenses can rise more than 50% over 15 years, requiring larger withdrawals from savings.

How does inflation impact pensions and fixed income sources?
Most pensions don’t increase with inflation, so their purchasing power declines over time. A pension that comfortably covers expenses at retirement may fall short within 10–15 years as costs rise, forcing retirees to draw more from savings.

Why are healthcare and long-term care costs such a concern in retirement?
Healthcare and long-term care expenses have been increasing faster than general inflation. Costs for prescriptions, medical services, and in-home care can grow at 5–7% annually, putting additional strain on retirement savings.

How can retirees plan for inflation and longevity risk?
Running detailed retirement projections that factor in inflation, longer life expectancy, and varying rates of return helps reveal whether savings are sufficient. This approach allows retirees to make informed decisions about spending, investing, and lifestyle adjustments.

When should retirees work with a financial planner?
Consulting a fee-based financial planner early in the retirement planning process can help test different inflation and longevity scenarios. A planner can build customized projections and ensure your plan remains flexible as costs and life circumstances evolve.

How Much Money Will You Need to Retire Comfortably?

By Michael Ruger, CFP®
Partner and Chief Investment Officer at Greenbush Financial Group

As a Certified Financial Planner who runs retirement projections on a daily basis, one of the most common questions I get is: “How much money do I need to retire?”

The answer may surprise you—because there’s no universal number. The amount you’ll need depends largely on one thing: your expenses.

In this article, we’ll walk through:

• Why expenses are the biggest driver of how much you need to retire

• How inflation impacts retirement spending

• Why the type of account you own matters

• The importance of factoring in all your income sources

• A quick 60-second way to test your own retirement readiness

Expenses: The Biggest Driver

When you ask, “Can I retire comfortably?”, the first question to answer is: How much do you spend each year?

For example:

• If your expenses are $40,000 per year, then $500,000 in retirement savings could potentially be enough—especially if you’re supplementing withdrawals with Social Security or a pension.

• But if your expenses are $90,000 per year, that same $500,000 likely won’t stretch nearly as far.

Your retirement lifestyle drives your retirement savings need. Someone with modest expenses may not need millions to retire, while someone with higher spending will require significantly more.

Don’t Forget About Inflation

It’s not just today’s expenses you need to plan for—it’s tomorrow’s too. Inflation quietly eats away at your purchasing power, making your cost of living higher every single year.

Here’s an example:

• At age 65, your expenses are $60,000 per year.

• If expenses rise at 3% annually, by age 80 they’ll be roughly $93,700 per year.

That’s a 50% increase in just 15 years—and you’ll need your retirement assets to keep up.

This is one of the hardest factors for individuals to quantify without financial planning software. Inflation not only increases expenses, but it changes your withdrawal rate from investments, which can impact how long your money lasts.

The Type of Account Matters

Not all retirement accounts are created equal. The type of retirement/investment accounts you own has a big impact on whether you can retire comfortably.

• Pre-tax accounts (401k, traditional IRA): Every dollar withdrawn is taxed as ordinary income. A $1,000,000 account might really be worth closer to $700,000 after taxes.

• Roth accounts: Withdrawals are tax-free, making these extremely valuable in retirement.

• After-tax brokerage accounts: Withdrawals often receive more favorable capital gains treatment, so the tax drag can be lighter compared to pre-tax accounts.

• Cash: Offers liquidity but typically earns little return, making it best for short-term expenses.

In short: Roth and after-tax brokerage accounts often provide more after-tax value compared to pre-tax accounts.

Factor in All Your Income Sources

Getting a general idea of your retirement income picture is key. This means adding up:

• Social Security benefits

• Pensions

• Investment income (dividends, interest, etc.)

• Part-time income in retirement

• Withdrawals from retirement accounts

Once you total these income sources, you’ll need to apply the tax impact. Only then can you compare your after-tax income against your after-tax expenses (adjusted for inflation each year) to see if there’s a gap.

This is exactly how financial planners build retirement projections to determine sustainability.

Find Out If You Can Retire in 60 Seconds

Curious if you’re on track? We’ve built a 60-second retirement check-up that can help you quickly see if you have enough to retire.

Bottom line: There’s no magic retirement number. The amount you need depends on your expenses, inflation, account types, and income sources. By running the numbers—and stress-testing them with a financial planner—you can gain the confidence to know whether you’re truly ready to retire comfortably.

Partner with a Fee-Based Financial Planner to Build Your Retirement Plan

While rules of thumb and calculators can provide a helpful starting point, everyone’s retirement picture looks different. Your income needs, lifestyle goals, and unique financial situation will ultimately determine how much you need to retire comfortably.

Working with a fee-based financial planner can help take the guesswork out of retirement planning. A planner will create a customized strategy that factors in your retirement expenses, investments, Social Security, healthcare, and tax planning—so you know exactly where you stand and what adjustments to make.

If you’d like to explore your own numbers and build a retirement roadmap, we’d love to help. Learn more about our financial planning services here.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions (FAQs)

How much money do I need to retire?
There’s no single number that fits everyone—the right amount depends primarily on your annual expenses, lifestyle, and income sources. A retiree spending $40,000 per year will need far less savings than someone spending $90,000.

Why are expenses the most important factor in retirement planning?
Your spending habits determine how much income your portfolio must generate. Knowing your annual expenses helps estimate your withdrawal needs, which directly drives how large your retirement savings must be.

How does inflation affect retirement spending?
Inflation gradually increases the cost of living, reducing the purchasing power of your money. At a 3% inflation rate, $60,000 in annual expenses today could rise to about $94,000 in 15 years, meaning your savings must grow to keep pace.

How does the type of retirement account impact how much you need to save?
Withdrawals from pre-tax accounts like 401(k)s and traditional IRAs are taxable, so you may need to save more to cover taxes. Roth IRAs and brokerage accounts often provide more after-tax value, since withdrawals may be tax-free or taxed at lower rates.

What income sources should I include when estimating retirement readiness?
Include all sources such as Social Security, pensions, dividends, part-time income, and withdrawals from savings. Comparing your total after-tax income against your inflation-adjusted expenses helps reveal whether you’re financially ready to retire.

How can I quickly estimate if I’m on track for retirement?
A simple way is to compare your projected annual expenses (adjusted for inflation) with your expected retirement income. Working with a fee-based financial planner can oftern provide a more comprehensive approach to answering the question “Do I have enough to retire?”

Don’t Gift Your House To Your Children

A common financial mistake that I see people make when attempting to protect their house from a long-term care event is gifting their house to their children.   While you may be successful at protecting the house from a Medicaid spend-down situation, you will also inadvertently be handing your children a huge tax liability after you pass away.  A tax liability, that with proper planning, could be avoided entirely.

Asset Protection Strategy

As individuals enter their retirement years, they become rightfully more concerned about a long-term care event happening at some point in the future.  The most recent statistic that I saw stated that “someone turning age 65 today has almost a 70% chance of needing some type of long-term care services at some point in the future” (Source: longtermcare.gov). 

Long-term care is expensive, and most states require you to spend down your countable assets until you reach a level where Medicaid starts to pick up the tab.    Different states have different rules about the spend-down process.  However, there are ways to protect your assets from this Medicaid spend-down process. 

In New York, the primary residence is not subject to the spend-down process but Medicaid can place a lien against your estate, so after you pass, they force your beneficiaries to sell the house, so Medicaid can recoup the money that they paid for your long-term care expenses. Since most people would prefer to avoid this situation and have their house passed to their children, they we'll sometimes gift the house to their kids while they're still alive to get it out of their name.

5 Year Look Back Rule

Gifting your house to your kids may be an effective way to protect the primary residence from a Medicaid lien, but this has to be done well before the long-term care event.  In New York, Medicaid has a 5-year look back, which means anything that was gifted away 5 years before applying for Medicaid is back on the table for the spend down and Medicaid estate lien.   However, if you gift your house to your kids more than 5 years before applying for Medicaid, the house is completely protected.

Tax Gifting Rules

So what’s the problem with this strategy?  Answer, taxes.  When you gift someone a house, they inherit your cost basis in the property. If you purchased your house 30 years ago for $100,000, you gift it to your children, and then they sell the house after you pass for $500,000; they will have to pay tax on the $400,000 gain in the value of the house.  It would be taxed at a long-term capital gains rate, but for someone living in New York, tax liability might be 15% federal plus 7% state tax, resulting in a total tax rate of 22%.  Some quick math:

$400,000 gain x 22% Tax Rate = $88,000 Tax Liability

Medicaid Trust Solution

Good news: there is a way to altogether avoid this tax liability to your beneficiaries AND protect your house from a long-term care event by setting up a Grantor Irrevocable Trust (Medicaid Trust) to own your house.  With this solution, you establish an Irrevocable Trust to own your house, you gift your house to your trust just like you would gift it to your kids, but when you pass away, your house receives a “step-up in cost basis” prior to it passing to your children.   A step-up in cost basis means the cost basis of that asset steps up the asset’s value on the day you pass away. 

From the earlier example, you bought your house 30 years ago for $100,000, and you gift it to your Irrevocable Trust; when you pass away, the house is worth $500,000.  Since a Grantor Irrevocable Trust owned your house, it passes through your estate, receives a step-up to $500,000, and your children can sell the house the next day and have ZERO tax liability.

The Cost of Setting Up A Medicaid Trust

So why doesn’t every one set up a Medicaid Trust to own their house? Sometimes people are scared away by the cost of setting up the trust.  Setting up the trust could cost between $2,000 - $10,000 depending on the trust and estate attorney that you engage to set up your trust.   Even though there is a cost to setting up the trust, I always compare that to the cost of not setting up your trust and leaving your beneficiaries with that huge tax liability.   In the example we looked at earlier, paying the $3,000 to set up the trust would have saved the kids from having to pay $88,000 in taxes when they sold the house after you passed.

Preserves $500,000 Primary Residence Exclusion

By gifting your house to a grantor irrevocable trust instead of your children, you also preserve the long-term capital gain exclusion allowance if you decide to sell your house at some point in the future.  When you sell your primary residence, you are allowed to exclude the following gain from taxation depending on your filing status:

• Single Filer: $250,000

• Joint Filer: $500,000

If you gift your house to your children and then five years from now, you decide to sell your house for whatever reason while you are still alive, it would trigger a tax event for your kids because they technically own your house, and it’s not their primary residence.  By having your house owned by your Grantor Irrevocable Trust, if you were to sell your house, you would be eligible for the primary residence gain exclusion, and the trust could either buy your next house or you could deposit the proceeds to a trust account so the assets never leave the trust and remain protected for the 5-year lookback rule.

How Do Medicaid Trusts Work?

This article was meant to highlight the pitfall of gifting your house to your kids; however, if you would like to learn more about the Medicaid Trust solution and the Medicaid spend down process, please feel free to watch our videos on these topics below:

• Video: How To Protect Assets From The Nursing Home

• Video:  Should You Put Your House In A Trust?  

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions (FAQs):

Why is gifting your house to your children a mistake for Medicaid planning?
While gifting your home can protect it from Medicaid’s spend-down rules, it also transfers your cost basis to your children. When they sell the property after your death, they may owe significant capital gains taxes on the home’s appreciation—liability that could have been avoided with proper planning.

What is Medicaid’s five-year look-back rule?
Medicaid reviews all asset transfers made within five years prior to applying for benefits. If you gifted your home or other assets during that time, Medicaid may count those transfers against you, delaying eligibility or subjecting the home to a lien for care costs.

How does a Medicaid Trust protect your home and reduce taxes?
A Grantor Irrevocable Trust (commonly called a Medicaid Trust) allows you to transfer ownership of your home while retaining the right to live in it. When you pass away, the home passes through your estate and receives a step-up in cost basis, eliminating capital gains taxes for your heirs while protecting the home from Medicaid recovery.

What is a step-up in cost basis?
A step-up in cost basis resets the home’s taxable value to its fair market value on the date of your death. For example, if you bought your home for $100,000 and it’s worth $500,000 when you die, your heirs’ cost basis becomes $500,000—allowing them to sell it with little or no tax owed.

Can you still use the home sale exclusion with a Medicaid Trust?
Yes. Because a Grantor Irrevocable Trust maintains your tax identity, you retain the $250,000 (single) or $500,000 (married) exclusion on the sale of your primary residence. This benefit is lost if you transfer ownership directly to your children.

What does it cost to set up a Medicaid Trust?
Setting up a Medicaid Trust typically costs between $2,000 and $10,000, depending on the attorney and complexity of your estate. While this is an upfront expense, it often saves families tens of thousands of dollars in future tax liability and asset protection.

Can the trust sell or hold proceeds from the home?
Yes. If the home is sold, the proceeds can remain in the trust or be used to purchase another home, keeping the funds protected under the five-year Medicaid look-back rule. The key is ensuring the sale proceeds never leave the trust’s ownership.

Secure Act 2.0: RMD Start Age Pushed Back to 73 Starting in 2023

On December 23, 2022, Congress passed the Secure Act 2.0, which moved the required minimum distribution (RMD) age from the current age of 72 out to age 73 starting in 2023.  They also went one step further and included in the new law bill an automatic increase in the RMD beginning in 2033, extending the RMD start age to 75.

This is the second time within the past 3 years that Congress has changed the start date for required minimum distributions from IRAs and employer-sponsored retirement plans.  Here is the history and the future timeline of the RMD start dates:

1986 – 2019:     Age 70½

2020 – 2022:     Age 72

2023 – 2032:     Age 73

2033+:               Age 75 

You can also determine your RMD start age based on your birth year:

1950 or Earlier:   RMD starts at age 72

1951 – 1959:      RMD starts at age 73

1960 or later:      RMD starts at age 75   

What Is An RMD?

An RMD is a required minimum distribution.   Once you hit a certain age, the IRS requires you to start taking a distribution each year from your various retirement accounts (IRA, 401(K), 403(b), Simple IRA, etc.) because they want you to begin paying tax on a portion of your tax-deferred assets whether you need them or not. 

What If You Turned Age 72 In 2022?

If you turned age 72 anytime in 2022, the new Secure Act 2.0 does not change the fact that you would have been required to take an RMD for 2022.  This is true even if you decided to delay your first RMD until April 1, 2023, for the 2022 tax year.    

If you are turning 72 in 2023, under the old rules, you would have been required to take an RMD for 2023; under the new rules, you will not have to take your first RMD until 2024, when you turn age 73.

Planning Opportunities

By pushing the RMD start date from age 72 out to 73, and eventually to 75 in 2033, it creates more tax planning opportunities for individuals that do need to take distributions out of their IRAs to supplement this income.  Since these distributions from your retirement account represent taxable income, by delaying that mandatory income could allow individuals the opportunity to process larger Roth conversions during the retirement years, which can be an excellent tax and wealth-building strategy. 

Delaying your RMD can also provide you with the following benefits:

• Reduce the amount of your Medicare premiums

• Reduce the percentage of your social security benefit that is taxed

• Make you eligible for tax credits or deductions that you would have phased out of

• Potentially allow you to realize a 0% tax rate on long-term capital gains

• Continue to keep your pre-tax retirement dollars invested and growing

Additional Secure Act 2.0 Articles

• Mandatory Roth Catch-Up Contributions For High Wage Earners

• New Roth Simple IRA Contributions Beginning in 2023

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions (FAQs):

What is the new RMD age under the Secure Act 2.0?
Starting in 2023, the required minimum distribution (RMD) age increased from 72 to 73. Beginning in 2033, the RMD age will rise again to 75.

How does the new RMD timeline compare to previous rules?
Before 2020, RMDs began at age 70½. The Secure Act of 2019 moved it to age 72, and Secure Act 2.0 now increases it to age 73 in 2023 and age 75 starting in 2033.

How do you determine your RMD start age based on birth year?
If you were born in 1950 or earlier, your RMD started at 72. Those born between 1951 and 1959 begin at 73, and anyone born in 1960 or later will start at 75.

What if I turned 72 in 2022?
If you reached age 72 in 2022, you are still required to take your first RMD for that tax year, even if you delayed it until April 1, 2023. The new rule applies only to individuals turning 72 in 2023 or later.

What are the benefits of delaying RMDs?
Delaying RMDs can create valuable tax planning opportunities, including the ability to complete larger Roth conversions, reduce taxable income, lower Medicare premiums, and minimize taxes on Social Security benefits.

Can delaying RMDs impact long-term investment growth?
Yes. By postponing mandatory withdrawals, your tax-deferred savings can remain invested and continue to grow, potentially increasing your retirement assets over time.

Turn on Social Security at 62 and Your Minor Children Can Collect The Dependent Benefit

Not many people realize that if you are age 62 or older and have children under the age of 18, your children are eligible to receive social security payments based on your earnings history, and it’s big money.  However, social security does not advertise this little know benefit, so you have to know how to apply, the rules, and tax implications.  In this article, I will walk you through the following:

• The age limit for your children to be eligible to receive SS benefits

• The amount of the payments to your kids

• The family maximum benefit calculation

• How the benefits are taxed to your children

• How to apply for the social security dependent benefits

• Pitfall: You may have to give the money back to social security…..

Eligibility Requirements for Dependent Benefits 

Three requirements make your children eligible to receive social security payments based on your earnings history:

1. You have to be age 62 or older

2. You must have turned on your social security benefit payments

3. Your child must be unmarried and meet one of the following eligibility requirements:

• Under the age of 18

• Between the ages of 18 and 19 and a full-time student K – 12

• Age 18 or older with a disability that began before age 22

How Much Does Your Child Receive?

If you are 62 or older, you have turned on your social security benefits, and your child meets the criteria above, your child would be eligible to receive 50% of your Full Retirement Age (FRA) Social Security Benefit EVERY YEAR, until they reach age 18.   This can sometimes change a parent’s decision to turn on their social security benefit at age 62 instead of waiting until their Full Retirement Age of 67 (for individuals born in 1960 or later).  But it gets better because the 50% of your FRA social security benefit is for EACH child.  

For example, Jim is retired, age 62, and he has one child under age 18, Josh, who is age 12.  If he turns on his social security benefit at age 62, he would receive $1,200 per month, but if he waits until his FRA of 67, he would receive $1,700 per month.  Even though Jim would receive a lower social security benefit at age 62, if he turns on his benefit at age 62, Jim and his child Josh would receive the following monthly payments from social security:

Jim: $1,200  ($14,400 per year)

Josh: $850  ($10,200 per year)

Even though Jim receives a reduced SS benefit by turning on his benefit at age 62, the 50% dependent child benefit is still calculated based on Jim’s Full Retirement Age benefit of $1,700.  Josh will be eligible to continue to receive monthly payments from social security until the month of his 18th birthday.   That’s a lot of money that could go towards college savings, buying a car, or a down payment on their first house.

The Family Maximum Benefit Limit

If you have 10 children, I have bad news; social security imposes a “family maximum benefit limit” for all dependents eligible to collect on your earnings history.  The family benefits are limited to 150% to 188% of the parent’s full retirement age benefit.

I’ll explain this via an example.   Let’s assume everything is the same as in the previous example with Jim, but now Jim has four children, all under 18.  Let’s also assume that Jim’s Family maximum benefit is 150% of his FRA benefit, which would equal a maximum family benefit of $2,550 per month ($1,700 x 150%).  We now have the following:

Jim:  $1,200

Child 1:  $850

Child 2:  $850

Child 3:  $850

Child 4:  $850

If you total up the monthly social security benefits paid to Jim and his children, it equals $4,600, which is $2,050 over the $2,550 family maximum benefit limit. 

Always Use Your FRA Benefit In The Family Max Calculation

Here is another important rule to note when calculating the family maximum benefit, regardless of when your file for your social security benefits, age 62, 64, 67, or 70, you always use your Full Retirement Age benefit when calculating the Family Maximum Benefit amount. In the example above, Jim filed for social security benefits early at age 62. Instead of using Jim’s age $1,200 social security benefit to calculate the remaining amount available for his children, Jim has to use his FRA benefit of $1,700 in the formula before determining how much his children are eligible to receive.

Social security would reduce the children’s benefits by an equal amount until their total benefit is reduced to the family maximum limit.

These are the steps:

1. Jim Max Family Benefit = $1,700 (FRA) x 150% = $2,550

2. $2,550 (Family Max) - $1,700 (Jim FRA) = $850

3. Divide $850 by Jim’s 4 eligible children = $212.50 for each child

This results in the following social security benefits paid to Jim and his 4 children:

Jim:  $1,200

Child 1:  $212.50

Child 2:  $212.50

Child 3:  $212.50

Child 4:  $212.50

A note about ex-spouses, if someone was married for more than 10 years, then got divorced, the ex-spouse may still be entitled to the 50% spousal benefit, but that does not factor into the family maximum calculation, nor is it reduced for any family maximum benefit overages.

Social Security Taxation

Social security payments received by your children are considered taxable income, but that does not necessarily mean that they will owe any tax on the amounts received. Let me explain, your child’s income has to be above a specific threshold before they owe any federal taxes on the social security benefits they receive. 

You have to add up all of their regular taxable income and tax-exempt income and then add 50% of the social security benefits that they received.  If your child has no other income besides the social security benefits, it’s just 50% of the social security benefits that were paid to them.    If that total is below $25,000, they do not have to pay any federal tax on their social security benefit.  If it’s above that amount, then a portion of the social security benefits received will be taxable at the federal level.

States have different rules when it comes to taking social security benefits.  Most states do not tax social security benefits, but there are about 13 states that assess state taxes on social security benefits in one form or another, but our state New York, is thankfully not one of them.

You Can Still Claim Your Child As A Dependent On Your Tax Return

More good news, even though your child is showing income via the social security payment, you can still claim them as a dependent on your tax return as long as they continue to meet the dependent criteria.

How To Apply For Social Security Dependent Benefits

You cannot apply for your child’s dependent benefits online; you have to apply by calling the Social Security Administration at 800-772-1213 or scheduling an appointment at your local Social Security office.

Be Care of This Pitfall

There is one pitfall to the social security payment received by your child or children, it’s not a pitfall about the money received, but the issue revolves around the titling of the account that the social security benefits are deposited into when they are received on behalf of the child. 

The premise behind social security providing these benefits to the minor children of retirees is that if someone retires at age 62 and still has minor children as dependents, they may need additional income to support the household expenses.  Whether that is true or not does not prevent you from taking advantage of these dependent payments to your children, but it does raise the issue of the “conserved benefits” letter that many people receive once the child turns age 18. 

You may receive a letter from social security once your child is 18 instructing you to return any of the social security dependent payments received on your child’s behalf and saved.  So wait, if you save this money for our child to pay for college, you have to hand it back to social security, but if you spend it, you get to keep it?   On the surface, the answer is “yes,” but it all depends on who is listed as the account owner that the social security payments are deposited into on behalf of your child.

If the parent is listed as an owner or joint owner of the account, you are expected to return the saved or “conserved” payment to the Social Security Administration.  However, if the account that the social security payments are deposited into is owned 100% by your child, you do not have to return the saved money to social security. 

Then I will get the question, “Well, what type of account can you set up for a 12-year-old that they own 100%?”  Some banks will allow you to set up savings accounts in the name of a child at age 14, UTMA accounts can be set up at any age, and they are considered accounts owned 100% by the child even though a parent is listed as a custodian.

Watch out for the 529 account pitfall. For parents that want to use these Social Security payments to help subsidize college savings, they will sometimes set up a 529 account and deposit the payments into that account to take advantage of the tax benefits.  Even though these 529 accounts are set up with the child listed as the beneficiary, they are often considered assets of the parents because the parent has control over the distributions from the account.   However, you can set up 529 accounts as UTMA 529, which avoids this issue since the child is now technically the owner and has complete control over the assets at the age of majority.

FAFSA Considerations

Be aware that if your child is college bound and you expect to qualify for need-based financial aid, assets owned by the child count against the FAFSA calculation. The way the calculation works is that about 20% of any assets owned by the child count against the need-based financial aid that is awarded.  There is no way around this issue, but it’s not the end of the world because that means 80% of the balance does not count against the FAFSA calculation and it was free money from Social Security that can be used to pay for college. 

Social Security Filing Strategy

If you are age 62 or older and have minor children, it may very well make sense to file for Social Security early, even though it may permanently reduce your Social Security benefit once you factor in the Social Security payments that will be made to your children as dependents.  But, you have to make sure you understand how Social Security is taxed, the Security earned income penalty, the impact of Social Security survivor benefits for your spouse, and many other factors before making this decision. 

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions (FAQs):

Who is eligible for Social Security dependent benefits?
If you are age 62 or older, have turned on your own Social Security retirement benefits, and have unmarried children under 18 (or under 19 and still in high school), your children may qualify for dependent benefits. Children with disabilities that began before age 22 are also eligible.

How much can a child receive in Social Security benefits?
A qualifying child can receive up to 50% of your full retirement age (FRA) benefit amount each year until they turn 18. This is based on your FRA benefit—not the reduced amount if you start collecting early.

What is the family maximum benefit?
Social Security limits the total amount that can be paid to one family to between 150% and 188% of the worker’s FRA benefit. If total family benefits exceed this limit, each child’s payment is reduced proportionally.

Are children’s Social Security benefits taxable?
Yes, but most children won’t owe taxes. If your child’s total income, including 50% of their Social Security benefits, is under $25,000, no federal tax is due. Most states do not tax Social Security benefits, though about 13 states have their own rules.

Can I still claim my child as a dependent on my tax return?
Yes. Even though your child receives Social Security benefits, you can still claim them as a dependent if they meet the IRS dependency criteria.

How do I apply for my child’s benefits?
You cannot apply online. Call the Social Security Administration at 800-772-1213 or schedule an appointment at your local SSA office to apply for dependent benefits.

What happens to the money if it’s saved instead of spent?
If the Social Security payments are deposited into an account owned jointly with the parent, the SSA may require repayment of “conserved” funds once the child turns 18. However, if the payments are deposited into an account owned solely by the child (like a UTMA account), the funds generally do not have to be returned.

How do these benefits affect college financial aid (FAFSA)?
Assets owned by the child—such as those in a UTMA account—count more heavily against financial aid eligibility. About 20% of the child’s assets are included in the FAFSA calculation, but 80% are still excluded.

Should I file for Social Security early to access dependent benefits?
It can make financial sense to claim benefits at 62 if your children qualify for dependent payments, but you should carefully weigh the long-term trade-offs, including reduced personal benefits, taxes, and survivor benefits for your spouse.

Self-Employment Income In Retirement? Use a Solo(k) Plan To Build Wealth

It’s becoming more common for retirees to take on small self-employment gigs in retirement to generate some additional income and to stay mentally active and engaged.  But, it should not be overlooked that this is a tremendous wealth-building opportunity if you know the right strategies.  There are many, but in this article, we will focus on the “Solo(k) strategy.” 

What Is A Solo(K)

A Solo(k) plan is an employer-sponsored retirement plan that is only allowed to be sponsored by owner-only entities.   It works just like a 401(k) plan through a company but without the high costs or administrative hassles.  The owner of the business is allowed to make both employee deferrals and employer contributions to the plan.

Solo(k) Deferral Limits

For 2025, a business owner is allowed to contribute employee deferrals up to a maximum of the LESSER of:

• 100% of compensation; or

• $31,000 (Assuming the business owner is age 50+) or

• $34,750 (For individuals age 60-63)

Pre-tax vs. Roth Deferrals

Like a regular 401(K) plan, the business owner can contribute those employee deferrals as all pre-tax, all Roth, or some combination of the two.  Herein lies the ample wealth-building opportunity.  Roth assets can be an effective wealth accumulation tool.  Like Roth IRA contributions, Roth Solo(k) Employee Deferrals accumulate tax deferred, and you pay NO TAX on the earnings when you withdraw them as long as the account owner is over 59½ and the Roth account has been in place for more than five years. 

Also, unlike Roth IRA contributions, there are no income limitations for making Roth Solo(k) Employee Deferrals and the contribution limits are higher.  If a business owner has at least $31,000 in compensation (net profit) from the business, they could contribute the entire $31,000 all Roth to the Solo(K) plan.   A Roth IRA would have limited them to the max contribution of $8,000 and they would have been excluded from making that contribution if their income was above the 2025 threshold.

A quick note, you don’t necessarily need $31,000 in net income for this strategy to work; even if you have $18,000 in net income, you can make an $18,000 Roth contribution to your Solo(K) plan for that year.  The gem to this strategy is that you are beginning to build this war chest of Roth dollars, which has the following tax advantages down the road……

Tax-Free Accumulation and Withdrawal:  If you can contribute $100,000 to your Roth Solo(k) employee deferral source by the time you are 70, if you achieve a 6% rate of return at 80, you have $189,000 in that account, and the $89,000 in earnings are all tax-free upon withdrawal.

No RMDs:  You can roll over your Roth Solo(K) deferrals into a Roth IRA, and the beautiful thing about Roth IRAs are no required minimum distributions (RMD) at age 73 or 75.  Pre-tax retirement accounts like Traditional IRAs and 401(k) accounts require you to begin taking RMDs at age 73 or 75 based on your date of birth, which are forced taxable events; by having more money in a Roth IRA, those assets continue to build.

Tax-Free To Beneficiaries: When you pass assets on to your beneficiaries, the most beneficial assets to inherit are often a Roth IRA or Roth Solo(k) account.   When they changed the rules for non-spouse beneficiaries, they must deplete IRAs and retirement accounts within ten years. With pre-tax retirement accounts, this becomes problematic because they have to realize taxable income on those potentially more significant distributions.  With Roth assets, not only is there no tax on the distributions, but the beneficiary can allow that Roth account to grow for another ten years after you pass and withdraw all the earnings tax and penalty-free.

Why Not Make Pre-Tax Deferrals?

It's common for these self-employed retirees to have never made a Roth contribution to retirement accounts, mainly because, during their working years, they were in high tax brackets, which warranted pre-tax contributions to lower their liability.   But now that they are retired and potentially showing less income, they may already be in a lower tax bracket, so making pre-tax contributions, only to pay tax on both the contributions and the earnings later, may be less advantageous.  For the reasons I mentioned above, it may be worth foregoing the tax deduction associated with pre-tax contributions and selecting the long-term benefits associated with the Roth contributions within the Solo(k) Plan.

Now there are situations where one spouse retires and has a small amount of self-employment income while the other spouse is still employed.  In those situations, if they file a joint tax return, their overall income limit may still be high, which could warrant making pre-tax contributions to the Solo(k) plan instead of Roth contributions.  The beauty of these Solo(k) plans is that it’s entirely up to the business owner what source they want to contribute to from year to year. For example, this year, they could contribute 100% pre-tax, and then the following year, they could contribute 100% Roth. 

Solo(k) versus SEP IRA

Because this question comes up frequently, let's do a quick walkthrough of the difference between a Solo(k) and a SEP IRA. A SEP IRA is also a popular type of retirement plan for self-employed individuals; however, SEP IRAs do not allow Roth contributions, and SEP IRAs limit contributions to 20% of the business owner’s net earned income.  Solo(K) plans have a Roth contribution source, and the contributions are broken into two components, an employee deferral and an employer profit sharing.

As we looked at earlier, the employee deferral portion can be 100% of compensation up to the Solo(K) deferral limit of the year, but in addition to that amount, the business owner can also contribute 20% of their net earned income in the form of a profit sharing contribution.

When comparing the two, in most cases, the Solo(K) plan allows business owners to make larger contributions in a given year and opens up the Roth source.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions (FAQs):

What is a Solo(k) plan?
A Solo(k) is a 401(k)-style retirement plan designed for self-employed individuals or business owners with no employees other than a spouse. It allows both employee and employer contributions, offering high contribution limits and flexible tax options.

How much can you contribute to a Solo(k) in 2025?
For 2025, you can contribute the lesser of 100% of your compensation or up to:

• $31,000 if age 50 or older

• $34,750 if age 60–63
  These limits include employee deferrals and do not count potential employer profit-sharing contributions.

Can Solo(k) contributions be Roth or pre-tax?
Yes. You can choose to make contributions as pre-tax, Roth, or a combination of both. Roth contributions are made with after-tax dollars but grow tax-free, and qualified withdrawals are also tax-free.

Why might Roth Solo(k) contributions be advantageous for retirees?
Roth Solo(k) assets grow tax-free, have no required minimum distributions (RMDs) once rolled into a Roth IRA, and can be passed to beneficiaries without income tax. For retirees in lower tax brackets, contributing to Roth accounts may provide long-term tax benefits over pre-tax deferrals.

Can you make Roth contributions to a SEP IRA?
No. SEP IRAs only allow pre-tax contributions and do not offer a Roth option. This makes the Solo(k) plan a more flexible choice for self-employed individuals looking to build tax-free retirement income.

How does a Solo(k) compare to a SEP IRA?
A Solo(k) allows both employee deferrals (up to 100% of income) and employer profit-sharing contributions, plus the option for Roth contributions. A SEP IRA limits contributions to 20% of net earned income and only allows pre-tax contributions, typically resulting in lower total contribution potential.

Is a Solo(k) a good option for retirees with part-time income?
Yes. For retirees earning even modest self-employment income, a Solo(k) can be a powerful tool to continue saving for retirement—especially with Roth contributions that provide future tax-free income and estate planning advantages.