Retirement

Q&A: A retirement catch-22 and health savings accounts

September 23, 2024 By Liz Weston

Dear Liz: My wife and I are withdrawing an unusually large amount from our IRAs in order to make a 20% down payment on the construction of a new retirement home. This withdrawal will, unfortunately, bring our modified adjusted gross income above the limits that will cause increases in our Medicare premiums in 2026. Is there any way to avoid this increase?

Answer: You have the right to appeal an increase in your premiums, but successful appeals usually require someone to have experienced a drop in income due to retirement, a spouse’s death or divorce, for example. A one-time increase in your income — because of a large IRA withdrawal or capital gains from the sale of a home, for example — usually won’t qualify for relief.

As you know, Medicare’s income-related monthly adjusted amount (IRMAA) adds surcharges to Part B and Part D premiums when incomes exceed certain amounts. In 2024, IRMAA starts when modified adjusted gross income exceeds $103,000 for individuals or $206,000 for married couples filing jointly. There’s a two-year delay between when you report your income and when IRMAA increases your premiums.

The good news is that the increase isn’t permanent. If your income goes back to normal next year, so will your 2027 premiums.

Q&A: Health savings accounts offer big tax benefits. The trick is knowing when to use the funds

September 16, 2024 By Liz Weston

Dear Liz: My retirement account covers all my expenses, including medical. I also have $60,000 in a health savings account that is invested in a mutual fund. I’m struggling with how to use that. I could use it for all current medical costs, or just for unexpected big ones. Or I could keep the HSA as backup in hopes of leaving it to my heirs. All options seem to have advantages, and I’m stuck. Your thoughts?

Answer: HSAs offer a rare triple tax benefit: Contributions are deductible, the money grows tax deferred and withdrawals can be tax free if there are qualifying medical expenses.

If anyone other than your spouse inherits the HSA, however, it basically stops being an HSA. The account becomes taxable to the beneficiary in the year you die, which means the HSA loses one of its three tax breaks.

Inheriting an account that’s taxable is probably better than no inheritance at all. But generally it’s better to use the HSA yourself or leave it to a spouse and designate other money for heirs.

Trying to figure out the optimum rate of spending this money is obviously tricky. The longer you leave it alone, the more it can grow. But the longer you live without spending it, the greater the risk you’ll die without taking advantage of those tax-free withdrawals.

If you’re reluctant to tap the HSA, give yourself the option of “deathbed drawdown.” By keeping good records, you may be able to empty the account at the last minute and avoid taxes.

As you may know, you don’t have to incur a qualified medical expense in the same year you take an HSA withdrawal for the distribution to be tax free. As long as the expense is incurred after the HSA is established and before you die, it can justify a tax-free withdrawal, as long as the expense wasn’t reimbursed — paid by insurance or used for a previous HSA withdrawal. So keep careful records of all the medical expenses that you pay out of pocket. If you get a bad diagnosis or your health starts to deteriorate, you can use those receipts to justify a tax-free withdrawal.

Q&A: Managing mortgage debt in retirement

April 29, 2024 By Liz Weston

Dear Liz: My husband and I are Gen Xers who are renting. We have enough cash from the sale of our last home to make a small down payment on another. If we moved to a more affordable community, we could manage the payments, but it would still be a stretch. That scenario would not have bothered me 10 years ago, but now I’m close to 50. Is it a good idea to take on a mortgage at this point? What is the best way to ensure I can afford to keep the roof over my head when I can no longer work full time?

Answer: Having a mortgage in retirement used to be uncommon, but that’s no longer the case. The Joint Center for Housing Studies of Harvard University found 41% of homeowners 65 and older had a mortgage in 2022, compared with 24% in 1989. Among homeowners 80 and over, the percentage with mortgages rose from 3% to 31%.

The amounts owed have skyrocketed as well. Median mortgage debt for those 65 and older rose more than 400%, from $21,000 to $110,000 (both figures are in 2022 dollars). Median mortgage debt for those 80 and over increased more than 750%, from $9,000 to $79,000.

Mortgage debt doesn’t have to be a crisis if you can afford the home and the payments don’t cause you to run through your retirement savings too quickly. In fact, some retirees are better off hanging on to their loans. It may not make sense to prepay a 3% mortgage when you can earn 5% on a certificate of deposit, for example. Paying off a mortgage early also could leave you “house rich and cash poor,” with not enough savings to deal with emergencies and later-life expenses.

But the key is affordability. A mortgage that’s a stretch now might become easier to afford if your income rises, which was almost a given when you were younger. Now, however, you’re approaching the “dangerous decade” of your 50s, when many people wind up losing their jobs and failing to ever regain their former pay, according to a study by ProPublica and the Urban Institute.

Renting has its risks as well, of course. You aren’t building equity and you typically have little control over rent increases, other than to move.

For help in sorting through your options, consider talking to a fee-only, fiduciary advisor. Among the most affordable options are accredited financial counselors and accredited financial coaches, who typically are well-versed in the money issues facing middle-class Americans. You can get referrals from the Assn. for Financial Counseling & Planning Education at www.afcpe.org.