In an environment of swelling health care expenses and inflation, examining ways to mitigate those costs, especially as they relate to Medicare, is becoming an increasingly important way for advisers to add value for clients.
Not only are health care and Medicare the only mandatory costs built into a retirement income picture, but they're also the largest, more than recreation and housing costs combined, according to Peter Stahl, a certified financial planner and founder of Bedrock Business Results.
There's also “massive” consumer concern and confusion when it comes to health care expenses, Mr. Stahl said Tuesday at the InvestmentNews Retirement Income Summit in Chicago, underscoring the importance of addressing the topic with clients.
So few people realize, however, that annual retirement income dictates an individual's annual Medicare premiums, according to Mary Beth Franklin, a certified financial planner and contributing editor at InvestmentNews.
Therefore, it's imperative to understand a client's modified adjusted gross income (MAGI) and plan around certain income thresholds, potentially taking withdrawals from tax-advantaged accounts to keep income under those break points, according to Mr. Stahl.
“The savings are real,” Mr. Stahl said. For example, moving a married couple's tax bracket one threshold lower can save them $65,000 in Medicare costs over a 20-year retirement, he said. And the savings are especially important given “health care inflation isn't grocery-store inflation or Home Depot inflation” — Medicare Part B inflation runs at 7.87% and Part D is at 7.12%, for example.
Non-qualified annuities, Roth accounts, health savings accounts, a 401(h) plan, permanent life insurance policies and reverse mortgages are all tax-advantaged ways to potentially lower a client's tax bill with respect to Medicare premiums. A 401(h) is a plan that applies to owners of small businesses that have a defined benefit plan, and is essentially an HSA that sits side by side with the defined benefit plan, Mr. Stahl said.
Advisers can also manage their clients' modified adjusted gross income through management of required minimum distributions, via tax deductions available for charitable giving or using a qualified longevity annuity contract, for example. QLACs are a type of longevity annuity that aren't subject to required minimum distribution rules.
Taxes from an annuitized income stream from non-qualified annuities adhere to an exclusion ratio, meaning there's both a tax-free and taxable portion of the distribution. Withdrawals and policy loans from permanent life insurance policies are tax-free, as long as the withdrawals adhere to specific guidelines; proceeds from a reverse mortgage also aren't subject to state and federal income tax.
Health savings accounts, which are available in conjunction with a high-deductible health plan, are becoming a “big trend,” Mr. Stahl said. Because of the triple-tax-advantaged nature of the accounts, and because health costs will be greatest during one's retirement years, it makes sense for clients to save HSA funds until later in life and fund current health expenses with other disposable income if possible, he said.
Tax-free HSA distributions can only be made for current, qualifying health expenses, such as deductibles and co-pays, or, importantly, for an expense individuals had previously when they owned the HSA. For example, Mr. Stahl said his children racked up around $15,000 in expenses for orthodontic work when he had an HSA; he paid out-of-pocket, and saved the receipts so he can get a tax benefit in future years based on those receipts.
“There is no time limit on the receipts,” Mr. Stahl said.