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Updated July 31, 2026. Quick answer: self-funding care is a withdrawal-order problem. A care year is usually a year of enormous deductible medical expenses, which can absorb the tax on money coming out of IRAs and 401(k)s — so the standard “taxable first” habit is often exactly backwards once care begins. The plan is: know the number, park it where it survives, and know which account pays first.
The number
What care actually costs (2025 survey medians)
- $129,575/year ($355/day) — nursing home, private room; semi-private $114,975.
- $74,400/year ($6,200/month) — assisted living.
- $80,080/year — in-home care at the $35/hour median, 44 hours/week.
Source: CareScout 2025 Cost of Care Survey (25,000+ provider rates collected July–November 2025, published by Genworth). These are national medians — metro areas run materially higher — and they are the defaults in the calculator below, editable to your area.
Your personal version — projected forward at care inflation and discounted at your return — is the ring-fence pot from the breakeven calculator.
Which account pays
Care costs that qualify as medical expenses are deductible above the AGI floor once you itemize — and a $120,000 care year clears that floor many times over. Those deductions can offset the ordinary income of tax-deferred withdrawals in the same year, which can make the care years the cheapest years of your life to drain an IRA. That inverts the default order most self-funders run. The mechanics, worked properly: the withdrawal order calculator and withdrawal order in a low-income year.
Where the pot lives
A ring-fence that is 100% equities in the year care begins is not a ring-fence. Money with a known job and an unknown start date wants a ladder or short-duration allocation for the near tranche and growth only for the tail tranche. And it should be titled and documented so a spouse or executor can find and use it — care decisions are usually made by someone else, under time pressure.
The two exits people back into
Home equity funds a large share of American care by default — workable, but it works best decided in advance rather than in a crisis sale. And Medicaid is the payer of last resort with a five-year lookback on transfers; late-stage giveaways mostly do not work. How that interacts with conversions: Roth conversions and the Medicaid horizon.
A plan on a page beats a plan in your head.
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The number that surprises people who bought a long time ago
Downsizing is the one home sale where the gain is usually large and the exclusion usually still covers it. A couple who bought in 1994 for $180,000 and sell at $760,000 with $46,000 of selling costs have a realized gain of about $534,000 before improvements. That is above the $500,000 joint cap — but decades of capital improvements are exactly what brings it back under, and most sellers have never added them up.
Improvements are the lever, and the records are the constraint
A new roof, an addition, a replaced HVAC system, new windows, a finished basement: these add to basis. Repainting and repairs do not. Thirty years of improvements on a family home routinely total six figures, and every dollar of it reduces the gain dollar for dollar. The practical problem is documentary, not legal — the seller who kept receipts pays less than the identical seller who did not.
Why downsizers should check the net investment income tax separately
A retiree with modest ordinary income can still be pushed over the 3.8 percent NIIT threshold by the sale itself, because taxable gain is net investment income. The thresholds are $250,000 on a joint return and $200,000 otherwise, written into Section 1411(b) as fixed figures with no indexing. A sale that produces $120,000 of taxable gain on top of $180,000 of other income crosses the joint threshold and picks up 3.8 percent on the part above it.
The move itself may change the tax
Downsizing usually means moving, and sometimes across a state line. Some states tax the gain the federal exclusion just removed. If the sale and the move are in the same year, the order of the two matters, and it is worth checking the destination state before signing.
Related
Methodology
- Exclusion caps, the 2-of-5 test, the nonqualified-use allocation, the reduced-exclusion fraction and the depreciation carve-out are taken from the text of 26 U.S.C. 121. The 3.8 percent rate and its thresholds are from 26 U.S.C. 1411. Both were read on 2026-07-30.
- Section 121 caps and Section 1411 thresholds are written in the statute as fixed dollar amounts with no indexing mechanism, so they are built in. Long-term capital gain brackets ARE indexed annually, so your rate is an input rather than a lookup.
- Figures were computed by two independently written engines that agree to the cent, and the calculator on this page reproduces both exactly.
- Federal only. State treatment varies and some states do not follow the federal exclusion.
Educational estimate, not tax advice, and not a filed return. Federal only. Confirm anything that changes a filing decision with a CPA or tax attorney.
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If the private-pay plan runs out, Medicaid is the backstop — and its two clocks reward planning done five years early: the look-back penalty formula and what estate recovery can reach in your state.