Real Estate

The IRS retirement loophole

How will you survive financially in retirement?

By one estimate, a 65-year-old American couple retiring in 2017 will need a minimum of $ 13,000 per year for 20 years, $ 260,000 before inflation.

I don’t have to tell you what it would be like to live on $ 13,000 a year or $ 1,083 a month. Sure you can imagine it perfectly. Just start subtracting optional items and reduce essential items to that number.

It’s not a pretty picture, is it? Now add the health care expenses.

Thirteen thousand dollars a year isn’t going to cover much, if anything … especially if Republicans in Congress succeed in their long-standing goals of turning Medicare into insurance vouchers and reducing Social Security benefits.

How about saving more for retirement? I hate when the so-called “financial advice” columns tell me to do that. It is like telling a hungry person to eat more. They would if they could.

Fortunately, there is a “trick” you can apply to existing insurance and tax regulations that could allow you to end the threat of a poverty stricken retirement …

If you don’t know what a Health Savings Account (HSA) is, it’s time to find out.

If you have good health, good luck, and the financial means to pay most of your health care costs out of pocket before you retire, an HSA could be a great way to save for the health care bills you’ll face in retirement. . and thus make your overall retirement kitty stretch even more.

An HSA is a tax-advantaged savings account that you contribute money to before taxes, such as a 401 (k) or an IRA. It lowers your current tax bill, and when your HSA manager invests the money, it grows tax-free just like any retirement account.

If you use the HSA money for qualified medical expenses, you don’t owe any taxes on that money. Always. That makes an HSA even more advantageous than a 401 (k) or IRA, where your post-retirement withdrawals are taxed as ordinary income.

And unlike those retirement plans, no minimum distributions are required for HSAs. If the HSAs become inheritable, as the Trump administration seeks, any balance could be transferred to your surviving spouse and / or heirs.

Pay and save now, retire later

However, there is a catch.

HSAs are only available to people with a high deductible health insurance plan. Under IRS rules for 2017, that means plans with a deductible of at least $ 1,300 for singles, or at least $ 2,600 for family coverage. That is what you must pay out annually before the insurance takes effect.

In the real world, the average deductible for people with a high deductible plan combined with an HSA is about $ 2,295 for single workers and $ 4,364 for family coverage. You must be able to spend at least that amount on your own health care now to take advantage of an HSA. (Tea maximum Out-of-pocket expenses for deductibles and copayments for people with high deductible plans are $ 6,550 for individuals and $ 13,100 for family coverage in 2017.)

Of course, high deductible plans have lower premiums than traditional plans, which is a bonus. But for an HSA to work for retirement, you must take the money you save in lower premiums and put it into the HSA now.

That seems to be precisely the way people use HSAs. A Congressional Budget Office study found that most people with HSA were paying current medical costs, including surgery and other major expenses, with current income in order to maximize their contributions to their HSA.

If you’re disciplined about saving and have enough monthly cash flow to cover your current healthcare costs, letting your tax-free HSA money grow tax-free will provide you with another source of income when you retire … one that will make you it is unnecessary to use your other retirement income for health care expenses.

Stay ahead of the curve

With all those benefits, HSAs are a great hidden benefit of the current US tax code The only downside is the need to go the high deductible route with current health insurance.

But we may not have many options in this regard anyway. Republicans have been pushing for higher deductible plans for years, and Trump says he wants to encourage them too.

On top of that, Obamacare’s so-called “Cadillac tax,” which taxes the value of the most generous employer health plans, will take effect in 2020. That threat is already pushing employers toward high-deductible plans.

Of course, most companies in general, regardless of whether they want to cut their healthcare costs from Obamacare or any other legislation. That’s why a growing number of U.S. employees are covered by a high deductible health plan combined with an HSA – a 25% increase from 2015 to 2016 alone.

But wait, there is more

Generally, the qualified expenses for HSAs are the same as for claiming the medical expense deduction on your 1040 tax return. But there is an allowable deduction that is a real winner for many of us … subject to a certain maximum, the Premiums you pay for long-term care insurance can come out of your HSA, tax-free.

That means you can increase your tax-free savings for retirement medical costs and lower those costs through insurance that covers the most expensive parts.

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