Many pre-retirees are quietly sitting on an annuity they bought years ago and no longer need for income. It has grown — and that growth is the problem. Under normal rules, when you withdraw from a non-qualified annuity (one you funded with after-tax dollars, outside an IRA or 401(k)), the gains come out first and are taxed as ordinary income. That idle annuity is carrying a built-in tax bill.
At the same time, a much larger cost is looming. According to the U.S. Department of Health & Human Services, more than half of Americans turning 65 today will need some form of long-term care in their lifetime — and paying for it out of pocket can quietly drain a lifetime of savings. Most people face these two facts separately. The Pension Protection Act lets you solve them together.
The Pension Protection Act (PPA) of 2006 created a tax break that took full effect in 2010, and most people have never heard of it. Here's the heart of it: when the money from a qualifying annuity is used to pay for qualified long-term care expenses, those withdrawals come out income-tax-free — even the gains that would otherwise be taxable.
In other words, the same dollars that would be taxed if you simply withdrew them for spending can come out entirely tax-free when they're used for care. This applies both to the base annuity contract and to its long-term care benefit riders (sometimes called Continuation of Benefits).
How the repositioning works
You own an old non-qualified annuity with gains you'd rather not pay tax on — or a CD or similar asset you don't need for income.
Using a 1035 exchange — an IRS-permitted transfer that moves one annuity into another without triggering tax — the annuity is repositioned into a PPA-compliant annuity designed for long-term care.
That new contract typically provides a multiple of your deposit in long-term care coverage — and when you draw on it for qualified care, the benefits are income-tax-free.
If you never need care, the annuity's value generally remains available to you or your heirs — so the money isn't "used up" the way a traditional stand-alone LTC insurance premium can be.
Repositioned through a 1035 exchange into an LTC-optimized annuity, a $200,000 contract could provide substantially more in tax-free care benefits than its cash value — turning a taxable asset into leveraged, tax-free protection. Actual leverage, terms, and eligibility vary by carrier, contract, health, and age, and are never guaranteed. This figure is illustrative, not a quote.
The alternative most people default to is liquidating savings to pay for care — often realizing taxable gains at the worst possible moment, in a year when medical costs are already high. The PPA strategy flips that: it lets you pre-position an asset you already own so that care, if you need it, is funded with tax-free dollars instead.
This strategy tends to fit best if several of these describe you:
You may be a candidate if…
None of this is one-size-fits-all. Whether a 1035 exchange makes sense depends on your specific contract, its surrender terms, your health, your age, and how it fits the rest of your plan — which is exactly the kind of thing a diagnosis-first review is built to sort out.
Do you have an old annuity that could do more?
In a complimentary review, we'll look at what you already own and whether repositioning it for tax-free care makes sense for your situation — no pressure, no obligation.