Retiring Early? Discover Ways to Fund Health Care
If your goal is to retire early, you’ll need a plan for funding health care until Medicare kicks in. Here are some answers to questions about some of the common sources you might rely on to fund it.
Q: Can I Use an HSA to Pay for Health Care?
A: Yes. If you work for an employer that offers a health savings account (HSA), you can use HSA funds to pay for eligible medical expenses. To qualify for an HSA, you must be enrolled in a high-deductible health plan (HDHP), which usually has lower monthly premiums than a traditional health insurance policy. Note that HSAs are portable, so if you leave your job for any reason, the account goes with you.
Q: What Tax Advantages Do HSAs Offer?
A: HSAs offer multiple tax benefits. Earnings in the account are not taxed, giving them an opportunity to grow. Contributions are tax deductible, and employer contributions are not counted as part of your taxable income. What’s more, withdrawals for qualified medical expenses are not taxed. Note that funds used for non-eligible expenses are subject to a 20% penalty.
Q: Can I Use an HSA if I’m on Medicare?
A: No. Once you are on Medicare, you can’t contribute pre-tax dollars to your HSA because you can’t have any health plan other than an HDHP to do so. If you plan to use the account to pay for medical expenses in retirement, consider maximizing your annual contributions. Note that after age 65, you can use your HSA funds for anything you like, whether that’s Medicare premiums or other non-medical retirement expenses.
Q: Who Is an HDHP Most Appropriate For?
A: An HDHP is generally considered a good option for younger, healthier people who often require only routine preventive care. Individuals and families who can afford to pay higher deductibles and max out their 401(k) contributions are also candidates, because an HDHP offers access to the multiple tax advantages of an HSA.
While HDHPs have low monthly premiums, the annual deductible for these plans is higher. The average annual premium for individuals covered by an employer-sponsored HDHP is $1,405 and $6,241 for families.1
Q: Which Medical Costs Does an HDHP Cover?
A: HDHPs typically cover all preventive, in-network care, such as routine screenings and certain immunizations, in full without copays or coinsurance before the deductible is met. When your out-of-pocket costs for medical services beyond that reach $7,500 for individuals and $15,000 for families in 2023,2 your plan will pay 100% of your expenses for in-network care.
If you pair an HDHP with an HSA, you can use funds in your HSA to pay for medical expenses that HDHPs don’t cover, including vision care, dental services and prescription drugs, which also count toward your annual HDHP deductible.
Q: Are There Income Limits to Qualify for Health Insurance Under the ACA?
A: No. Although the Affordable Care Act established the federal government’s online health insurance exchange to help subsidize costs for lower-income Americans, if you don’t have access to employer-based insurance or are not yet eligible for Medicare, you can buy health coverage through the exchange or your state’s own marketplace. Those whose household income is too high won’t qualify for tax credits.
ACA health insurance plans cover a wide range of essential health benefits, including emergency services, hospitalization, preventive and wellness services and prescription drugs. Plans are offered by various private insurers and are organized in tiers—bronze, silver, gold and platinum—from the least to the greatest coverage. To find a plan to meet your needs, compare the costs and benefits of plans on the health insurance exchange to those of plans offered directly to consumers by private insurance companies.
Q: Does It Make Sense to Use COBRA to Fund Health Care?
A: It depends. When you experience a “qualifying event,” such as a job loss or change in your family circumstances like a divorce, you can elect to continue your employer-provided group health insurance through COBRA (assuming your employer had at least 20 employees). You are responsible for paying the entire premium, including the amount your employer was subsidizing, plus an administration fee.
Although COBRA insures you for a limited period of typically 18 months, it may make sense to initially fund your health care with COBRA before buying private insurance. COBRA costs vary depending on where you live, with monthly insurance premiums ranging from $400 to $700 per individual on average.3
Q: Am I Eligible to Receive Health Insurance Coverage Through My Spouse?
A: If you’ve already retired but your spouse is still working, you may be eligible for health insurance through your spouse’s employer-sponsored health plan. Keep in mind that employers don’t have to make health insurance benefits available to their employees’ spouses or domestic partners.
Note that some employers impose a spousal surcharge for spousal health insurance, while others require spouses to pay a larger premium or higher cost share. So, you’ll want to factor potential costs into your decision.
If you opt to purchase spousal health insurance, you have 30 days after you retire—which is considered a qualifying event—to enroll. Otherwise, you’ll have to wait until the next open enrollment period.
Because the administration of an HSA is a taxpayer responsibility, you are strongly encouraged to consult your tax advisor before opening an HSA. You are also encouraged to review information available from the Internal Revenue Service (IRS) for taxpayers, which can be found on the IRS website at IRS.gov.
This article is provided for informational and educational purposes only, and the views expressed do not take into account any individual personal financial, legal, or tax considerations. As such, the information contained herein is not intended to be personal legal, investment, tax advice, or a solicitation to or recommendation to engage in any strategy mentioned. Any opinions expressed are based on information and sources of information deemed to be reliable, but Mariner Wealth Advisors does not warrant the accuracy of the information. Please seek advice from qualified tax, legal, and financial professionals before making any financial-related decisions.
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