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Nobody wants to spend their golden years languishing in a nursing home. They want fun, social connections and endless activities whether they are a bookworm or social butterfly. They also want access to care if and when they need it.

But getting that doesn’t come cheap. The average cost for a retirement community is around $350,000, and that’s just the entry fee. The monthly service fee can add another $3,500 to $4,500 a month to the bill.

“Some range well into the millions,” depending on the size of the home and if continuing care is included, said Brad Breeding, co-founder and managing partner at myLifeSite, a website dedicated to providing older adults with information about senior living.

Nonetheless, retirement communities are gaining in popularity, for good reasons. Older adults are more active than previous generations and want communities that give them independence and access to care if necessary.

Which type of retirement community is best?

Retirement communities typically come in two varieties: independent living retirement communities and Life Plan communities, formerly called continuing care retirement communities or CCRCs.

Independent living retirement communities, often referred to as 55+ communities, are house- and apartment-style planned developments for older adults who can live mostly independently — without requiring assistance with daily activities. Latitude Margaritaville in South Carolina and The Villages in Florida are two examples of independent living communities catering to active adults 55 and older.

A Life Plan Community or CCRC often combines independent living with a full continuum of care, including skilled nursing and rehab care, all provided under a continuing care contract. Erickson Senior Living’s Woodleigh Chase in Fairfax and Ashby Ponds in Ashburn are local examples of Life Plan communities.

What you get in a retirement community

Retirees setting down roots in either an independent living community or Life Plan/CCRC typically get access to a range of amenities, including dining halls, fitness centers, swimming pools, recreation centers, transportation, housekeeping, entertainment and continuing education.

Luxury retirement communities include all of the above plus wellness spas, high-end decor and upscale dining, among other perks.

With an independent living community, you typically pay an “entrance fee” or buy-in payment and then a recurring monthly fee to cover the cost of your house, amenities, maintenance, meals and activities.

The same is true of Life Plans/CCRCs, but the monthly fee will change when you begin to need care. Within a Life Plan community, the monthly payments can be:

Fee-for-service: When you need care your monthly fee increases to reflect the going price of healthcare.

Modified: An offshoot of a fee-for-service model, but the cost of care is discounted. Typically your monthly fee is more to reflect that.

Lifecare: Your monthly fee remains the same if you need healthcare services.

If you opted for a Life Plan community and change your mind about living there, your refund amount will depend on the contract you signed.

Tax-smart ways to pay

Whether you choose independent living or a Life Plan community, how you elect to pay for it matters. After all, it can impact your cash flow and taxes. That’s particularly true for high-net-worth individuals.

“The best way to pay for it is a well-diversified balance sheet of both tax-deferred and tax-free pools that you can draw from,” said Jeremiah Barlow, chief commercial officer at Mercer Advisors. That will enable you to spread the taxes out so you are not taking a big tax hit in year one.

If you sell your longtime house, for instance, you’ll face capital gains tax. To lower your capital gains tax bill, deduct closing costs, fees and any major home improvements.

“Tax loss harvesting” occurs when you sell investments at a loss to offset capital gains. If you are single and made $500,000 from the sale of your home but lost $250,000 by selling other assets, your tax bill would be much lower.

Another option to access equity in a home without triggering a taxable event is to recast or refinance a larger mortgage or utilize a home equity line of credit, Barlow said.

That could be particularly advantageous if there is a second generation who wants to live in the home and inherit it.

“They could take on the payments and expenses until the parents pass away. This would create a step up in cost basis upon death of the parent,” Barlow said. That would reduce the capital gains tax when the home is sold.

Beyond selling your home to cover the cost of a retirement community, Barlow said combining funding sources can be a tax-smart way to pay for a retirement community.

“Roth IRA withdrawals can be advantageous since qualified withdrawals from a Roth IRA are tax-free, helping to avoid additional tax liability,” he said.

Roth distributions are tax-free, and because they are not considered investment income, they won’t raise your modified adjusted gross income. If you have money in a traditional IRA or 401(k) you can do a Roth conversion, which reduces required minimum distributions.

“If there is time to plan, it would be advantageous to proactively navigate these accounts with Roth conversions, so more assets are tax-free in retirement,” Barlow said.

A Health Savings Account (HSA) can be used for long-term care, which may include some retirement housing expenses. However, long-term care generally does not cover non-medical costs such as room and board expenses, Barlow noted.

Look before you leap

Use caution when deciding which retirement community to buy into and how you’ll pay for it. You can employ many strategies, so it’s essential to seek help from a trusted financial adviser or tax professional before you plunk down your hard-earned cash.

© 2025 The Kiplinger Washington Editors, Inc. All rights reserved. Distributed by Tribune Content Agency, LLC.