You own two pots of money: The money that has already been taxed (let's call it "regular money") and the money that had not been taxed (let's call this "retirement money" such as IRA, 401(k), 403(b), etc.) When you spend $1 of retirement money, assuming your marginal tax bracket is 35%, the cost to you would be $1.54 ($1/.65) because you may have to pay federal income tax on the amount you withdraw. Therefore, if you want to reduce your taxes, consider not taking more than the required distribution from your retirement money.

Some people think they should never spend their principle, but this can be a mistake if you want to save taxes. It could be better to spend some of your regular assets first, so that you can take advantage of the tax-deferral benefits associated with IRAs and qualified retirement plans. You could be better off financially from an income tax standpoint. Your lifetime tax bill can be less or you will at least defer taxes for many years.

Consider the following hypothetical example that assumes you have a taxable regular money account and a tax-deferred retirement account with a $100,000 balance each. Let's assume the money in each account earns a hypothetical return of 6% per year. Let's further assume that annual distributions of $6,000 per year are being taken for a 20-year period. Under one scenario, the $6,000 will be taken first from the taxable money and the other scenario considers what would happen if the money was taken first from the qualified money. Under this example you would have $150,000 more at the end of 20 years by spending your regular money first. The upside is that you could potentially hold on to more money while you are alive.

Of course, the downside is that your beneficiaries will eventually have to pay income taxes on the money when you are gone. As the information provided but this example is hypothetical, actual results will vary depending on the performance of your investments.

Spend Regular Money First

Assumptions: All money is assumed to earn 6%. This assumed rate is used for tax illustration purposes only and does not reflect any particular investment. Federal Income taxes are assumed to be 35% in this example, and your income tax rate could be lower based upon your annual income. This illustration covers a 20-year duration, with distributions of $6,000 occurring each year. The income taxes on withdrawals are also deducted from the IRA account.

It comes down to the various income and asset resources you have available to you. To illustrate this, let’s take a look at the varying needs of three general groups:

• Low Resources
• High Resources
• Medium Resources

These groups are organized according to their income and asset resources. When reviewing this information, please keep in mind that nursing home costs and Medicaid qualification rules can vary widely from location to location. As everyone’s situation is different, the need for insurance can also vary among people within the same resource group.

Low Resources: This group has countable assets that are at or below the spend down limits imposed by their state Medicaid rules. Additionally, this group typically has monthly income below the average nursing home costs for the state where they live. In many cases, people that fall within this group will qualify for Medicaid without having to spend down their assets.

Countable assets include such things as cash, stocks, bonds, mutual funds, cash value insurance policies, CDs, boats, jewelry, and real estate investments. In most states, you will only qualify for Medicaid if you have no more than $2,000 in countable assets. Spouses of a nursing home resident who still live in the family home are allowed to retain countable assets up to 119,220 (2016), depending on the Medicaid rules in their state. The Medicaid rules will allow the live-at-home spouse (also referred to as the “community spouse”) to retain the family residence, a vehicle, and a modest amount of other assets for their support. The Medicaid rules also establish a monthly support allowance to help community spouses meet their living needs, and this allowance can be up to $2,980.50 per month depending on state law. This means that if the community spouse’s income falls below the allowance, the state will then allow the community spouse to keep an amount equal to the difference from the resident spouse’s income. On the other hand, a community spouse is usually not allowed to retain any income from the resident spouse if their income exceeds the allowance.

In some cases, even this group might want to consider the insurance if the monthly allowance is below the community spouse’s living needs. AARP offers this advice: “Long term care insurance makes sense for those who earn good salaries, have accumulated assets they want to protect and have plans for a comfortable retirement. The Street.com Rating says households with annual incomes of at least $50,000 to $75,000 and assets of $150,000 – not including car or house – might want to consider a policy. Financial planners typically recommend it for their clients, who tend to earn more.

High Resources: This group has sufficient monthly income to support the community spouse’s living needs and to cover the monthly nursing home costs in their area (which will vary from location to location). Alternatively, this group may have enough countable assets set aside to meet a three to five-year nursing home stay ($200,000 to $350,000 per spouse, depending on nursing home costs in their community). Many of these people, still do, however, obtain insurance because it can help them protect their estate from being reduced by a long-term care need. Most importantly, it can give them some added assurance by providing a separate source of funds to be used for long-term car

Medium Resources: This is the group that often needs the insurance. This group of people has countable assets that exceed the Medicaid limits, but they don’t make enough money to cover the monthly costs of nursing home care in their area. Another thing that separates this group from those with high resources is that they lack a separate source of assets to cover an extended stay in a nursing home. For this group, having to come up with $7,500 per month over a long period could potentially deplete their estate or create an economic hardship for the community spouse. If you are in this group, you should consider long-term care insurance. This insurance could help secure your financial independence. It can also help to preserve cherished assets for spouses and younger family members.