I’ve written about how to decide how much to set aside for long-term-care expenses for people who have decided to forgo insurance. But where and how should those funds be invested?
You don’t have to maintain a separate account for your long-term-care fund, but you do need to let your loved ones know of its existence.
The question is, which account makes the most sense, from a tax perspective, as a receptacle for out-of-pocket long-term-care costs?
A health savings account might look like the obvious choice. Withdrawals from an HSA to cover qualified healthcare expenses are tax-free, and most long-term-care expenses would qualify. There are a couple of drawbacks, however. One is that annual contribution limits—in 2026, they’re set at $4,400 for people with single coverage and $8,600 for those with family plans—might impede the ability of people over age 50 to build up a significant bulwark in the HSA between now and retirement. (Once you’re covered by Medicare, you can’t be covered by a high-deductible health plan; additional HSA contributions are also off limits.) It’s still well worth investing in an HSA if you have access to one, but you might not be able to gain critical mass for long-term-care expenses.
My other reservation is that the tax benefits of HSAs are almost too good for long-term-care expenses. That’s because long-term-care costs are deductible to the extent that they, combined with other healthcare outlays, exceed 7.5% of your adjusted gross income in a given year. That means that you could be taking tax-free withdrawals from the HSA in the same year that you had those very high deductions, so you’re not taking full advantage of the HSA’s tax benefits. Finally, any unused funds in that long-term-care bucket could pass to your heirs. The problem is that, if HSAs are inherited by someone other than your spouse, the tax benefits effectively cease upon your death.
To help take advantage of high deductions associated with long-term care, you’d ideally pull your long-term-care expenses from an account that itself is highly taxed. That points toward a traditional IRA. Most older adults have the bulk of their retirement savings in IRAs to begin with. Withdrawals from a traditional IRA or other traditional tax-deferred account are indeed taxable, to the extent that they consist of pretax contributions and investment earnings (in other words, the bulk of most tax-deferred accounts). But individuals incurring heavy long-term-care costs often easily exceed the threshold for deductibility of healthcare expenses. (In 2026, healthcare expenses that exceed 7.5% of adjusted gross income are deductible.) That means that the deduction can offset the taxes due on the IRA withdrawal.
Most long-term-care costs are incurred later in life, when required minimum distributions (which apply to traditional tax-deferred accounts for people over age 73) are in effect. In other words, the money has to come out of the account and be taxed at this life stage anyway, and the medical-expense deduction helps to ease the tax burden.
In terms of how to invest the long-term-care funds, one thing’s for sure: Cash isn’t going to cut it, especially if you haven’t yet retired or just did. That’s because long-term-care inflation has been running higher than the general inflation rate. In Genworth/CareScout’s 2025 Cost of Care survey, for example, inflation for assisted living was running above the general inflation rate. (To be fair, inflation was more modest in other long-term care categories.)
Obviously, outearning inflation is mission-critical for your long-term-care fund. You need some growth, and you need to take some risk to enable that growth.
Your proximity to spending your money should be the key determinant of how much risk to take. If you’re setting up a long-term-care fund in your mid-60s, for example, the data on long-term-care usage suggest that you’re unlikely to need care—or your fund—for another 15 years. (The average nursing home resident is 81.) In other words, at that life stage, your risk capacity is high, and your long-term-care portfolio should be built for growth and mainly parked in equities.
As you move into your mid-70s and a long-term-care need could realistically arise within the next five to 10 years, you can transition more of that portfolio to bonds and cash. A balanced asset allocation, along the lines of my Moderate Retirement-Bucket Portfolios, is a guide. If and when you begin spending from the long-term-care fund, it makes sense to position the assets more conservatively still, with the lion’s share of assets in bonds and cash.
Of course, none of this is an exact science because you’re missing some key inputs: You can’t tell in advance whether and when you’ll have a long-term-care need and for how long.
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This article was provided to The Associated Press by Morningstar. For more retirement content, go to https://www.morningstar.com/retirement.
Christine Benz is director of personal finance and retirement planning for Morningstar and co-host of The Long View podcast. Subscribe to her free newsletter, Improving Your Finances.
Related Links:
Don’t Fear Long-Term-Care Expenses. Prepare for Them
https://www.morningstar.com/retirement/dont-fear-long-term-care-expenses-prepare-them
Worried About Long-Term-Care Expenses? Let’s Do Something About It.
How Likely Are You to Have an Extended Long-Term-Care Need?
https://www.morningstar.com/retirement/how-likely-are-you-have-an-extended-long-term-care-need
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