My mom needs money to pay for care "“ should I take it out of my retirement account?
My mom's savings has run out and she doesn't want to leave her home, but she doesn't have the cash to pay for caregiver who comes everyday and helps her around the house and does her meals. I have some money saved up in my retirement account and would still be ok even if I had to take some out. Should I take the tax gouge and buy her another year of happiness in her home? Or is it better to look at other options?
Expert Answer
Your question about taking money out of a retirement account to pay for a parent's long term care is a common one. Although you are willing to sacrifice some of your retirement savings to get your mother the care she needs, there are better options for both of you.
You are correct that, if you tap your retirement account, you will have to pay income taxes on any withdrawals. More importantly, if you are under age 59 1/2, you will have to pay a 10% penalty on these withdrawals in addition to the taxes. Most importantly, you will need the money for your retirement.
I am assuming that your mother owns her home. If so, there are two options that can help her continue to pay her caregiver. The first is that she may be able to qualify for a home equity line of credit from her bank. This requires that she a good credit rating and can demonstrate that she can make the monthly payments. These payments can be interest-only, so they are manageable. Since interest rates are so low, this can be an attractive option.
If your mother cannot qualify for a home equity line of credit, the second option is a reverse mortgage. Many people dismiss reverse mortgages based on hearsay from friends or relatives. Homeowners, who took out reverse mortgages when they first became available, may very well have had bad experiences. Today, these mortgages are regulated by HUD (federal agency for Housing and Urban Development) and FHA (federal government) insured. In your mother's situation, the advantages of a reverse mortgage are that her credit score and ability to repay the loan have no impact on getting the loan. She does not have to make any payments on the mortgage as long as she lives in the house. When the house is sold, the mortgage and accumulated interest are paid from the proceeds of the sale. The balance of the proceeds goes to your mother or her heirs. If the house is worth less than what is owed on the mortgage, neither your mother nor her heirs owes any money to the lender. The downside of a reverse mortgage is that there are closing costs and fees. (These are included in the mortgage balance "“ nothing is paid out of pocket). For many people who wish to remain at home and need personal care, but cannot afford it, this is an important option.
Finally, if your father was a war veteran, your mother may be eligible for up to $1,056/month from the VA to help pay for her long term care.