Retirement health care expenses are a growing concern for retirees. The rising costs of health care and the accompanying factor of inflation create a growing need for advanced planning related to preparing for these costs. Currently, Medicare Part B inflation hovers around 8% and Part D around 7%.
Health care and Medicare expenses are one of the largest expenses, even more than recreation and housing costs combined. Consumers are often confused when it comes to the right amount to plan for under the “Medical Expenses” line in their household budgets. Many don’t realize that a person’s Medicare premiums are affected by their annual income. Understanding one’s MAGI (modified adjusted gross income) and implementing strategies to plan around certain income thresholds can positively affect health care 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 taxable income. Required Minimum Distributions (RMDs) occur when an IRA owner is required to begin taking withdrawals from his IRA in the year he turns age 70 ½. Using strategies to reduce IRA balances before 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 RMD rules and thus reduce taxes. ingress.
Annuities that are in the payout phase use a tax basis called an “Exclusion Ratio” – this simply means that the payment someone receives is treated as part “return on investment” and part “taxable interest”. Annuities can accept lump sum deposits and generate guaranteed income for life with potentially strong benefits from a tax planning standpoint. On the permanent life insurance front, the cash value in life insurance contracts can often be accessed tax-free through a policy loan provision. Finally, reverse mortgages create funds that are not subject to state and federal income taxes.
Health Savings Accounts are becoming a remarkable tax planning tool. They have “triple tax advantages” and, if implemented early, can create a tax-free mutual fund that can be used to finance health care expenses later in life.
Finally, tax planning goes hand in hand with investment planning. The combination of tax and investment planning can lead to real savings in your retirement years. Retirement is primarily about income rather than growth. Controlling spending, with taxes and health care front and center, can put more spendable money in the pockets of retirees to help them enjoy their retirement years.