Healthcare expenses in retirement is a growing concern for retirees. The increasing costs of healthcare and the inflation factor that goes along with it creates a growing need for advanced planning related to preparing for these costs. Currently Medicare Part B inflation is running around 8% and Part D around 7%.
Healthcare and Medicare expenses are one of the largest expenses – even larger than recreation and housing costs combined. Consumers are often confused when it comes to what is the proper amount to plan for on the “Medical Expenses” line item on their household budgets. Many do not realize that an individual’s Medicare premiums are affected by one’s annual income. Understanding one’s MAGI (Modified Adjusted Gross Income) and implementing strategies to plan around certain income thresholds can positively affect healthcare expenses in retirement.
Here’s an example – a married couple who moves their tax bracket one threshold lower can save $70,000 over their lifetime. How can planning make that happen?
Non-qualified annuities, Health Savings Accounts, Permanent Life Insurance, Reverse Mortgages, ROTH IRAs, are all ways to reduce one’s taxable income. Required Minimum Distributions (RMDs) occur when an IRA owner is forced to begin to take withdrawals from their IRAs in the year in which they turn 70 ½ years of age. Utilizing strategies to reduce IRA balances earlier in one’s retirement – such as ROTH Conversions, early withdrawals, and QLACs (Qualified Longevity Annuity Contracts) are ways to reduce the amount of funds that must be taken from IRAs under the RMD rules – and thereby reduce taxable income.
Annuities that are in payout phase use a tax basis called “Exclusion Ratio” – this simply means that the payment that someone receives is treated as part “return of investment” and part “taxable interest”. Annuities can take lump sum deposits and create guaranteed lifetime income with potentially solid benefits from a tax planning standpoint. On the Permanent Life Insurance front – cash value in life insurance contracts can often be accessed tax free through a provision of policy loans. Finally – Reverse Mortgages create funds that are not subject to state and federal income taxes.
Health Savings Accounts are becoming a notable tax planning tool. They have “triple tax advantages” and if implemented early can create a tax free pool of funds that can be utilized to fund healthcare expenses later in life.