Rising health care costs can derail the best-laid plans for retirement. A couple, both of them 65, who stop working in 2017 will need an average of $275,000 to cover medical costs throughout the rest of their lives, according to a Fidelity analysis.
Cutting such costs is crucial. The new year is the perfect time to look for ways to trim your health care tab, or to build up savings to help pay for future health care expenses.
Following are three bold ways retirees can tame health care costs in 2018. These ideas might not work for everyone, but many taxpayers will find they offer the potential for big savings.
Deduct more of your medical expenses
It’s no secret that retirees are more likely to need medical care than younger Americans. In the past, the government allowed taxpayers of all ages to deduct the cost of qualified medical expenses on their tax returns once those costs exceeded 7.5 percent of adjusted gross income.
After the Affordable Care Act was passed, the rule became less generous. The health reform law also known as Obamacare stated that taxpayers could deduct costs exceeding 10 percent of AGI. This reduced the amount of costs a taxpayer could deduct. The change initially applied only to taxpayers under the age of 65, but eventually was scheduled to impact taxpayers of all ages.
The recent GOP tax overhaul restored the 7.5 percent threshold for everyone — but just through 2018. After that, the limit is scheduled to rise back up to 10 percent.
Which expenses qualify for a deduction? Find out at the IRS website.
Contribute more to an HSA
As we have noted before, a health savings account is a great way to save for current and future medical expenses while also trimming your tax bill. Contributions offer a hat trick of tax benefits:
- The money is deductible from your income in the year of the contribution.
- Gains on your contributions grow in the account tax-free.
- Withdrawals are tax-free when they are used to pay for qualified medical expenses.
Millions of Americans — including many retirees — with a high-deductible health insurance plan are eligible to take advantage of this perk. Unlike most retirement accounts, you do not need to earn income to contribute to an HSA.
In 2018, the amount you can contribute to an HSA rises modestly — by $50 for individuals, and $150 for families. That takes the new limits to $3,450 for individuals, and $6,900 for families. Plus, if you are 55 or older, you can add another $1,000 to those limits.
Obviously, the strategy of funding an HSA in retirement works best if you have enough savings — or new income from part-time work — to funnel into the HSA.
Just remember that once you turn 65 and qualify for Medicare, you no longer can contribute to an HSA. However, you can still tap your HSA to pay for qualified medical expenses.
Slash your income to qualify for Obamacare help
Obamacare can be a blessing for anyone who plans to retire early. In the past, health insurance costs were a significant hurdle for many people who hoped to stop working before age 65, when Americans become eligible for Medicare.
But thanks to Obamacare rules, you can get financial help to cover health insurance premium costs in the years before you sign up for Medicare. By retiring early — and slashing your income — you might qualify for tax credits and subsidies that can dramatically reduce the sting of health insurance costs.
The federal government’s HealthCare.gov website can help you estimate how much you can save at various income levels.
Are you worried that you are too wealthy to qualify for these cost breaks? Don’t be so sure. According to news reports, some high-net-worth individuals have found ways to reduce their income and legally get a share of these tax breaks and subsidies.
Do you know of more great ways to slash health care costs in retirement? Share them by commenting below or our Facebook page.
Find the right financial adviser
Finding a financial adviser you can trust doesn't have to be hard. A great place to start is with SmartAsset's free financial adviser matching tool, which connects you with up to three qualified financial advisers in five minutes. Each adviser is vetted by SmartAsset and is legally required to act in your best interests.
If you're ready to be matched with local advisers who will help you reach your financial goals, get started now.