The reality of increasing medical expenses can impact the tranquility of your retirement. While comprehensive, Medicare doesn’t cover all expenses, making it necessary to have a robust strategy to manage healthcare costs effectively. In this blog, we explore various types of investment accounts and how they can help ensure a financially secure retirement.
Investing & Healthcare Costs
Investment strategies play a crucial role in covering healthcare costs in retirement. Health spending tends to increase as we age, so understanding how to leverage different types of investment accounts to fund these added costs can alleviate financial stress and ensure you receive the care you need throughout your golden years.
Types of Investment Accounts
Healthcare Savings Account (HSA)
HSAs are tax-advantaged accounts designed specifically for spending on medical expenses. Contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses (including certain Medicare costs) are also tax-free.
Brokerage Account
A standard brokerage account offers flexibility in withdrawal timings and investment choices. While these accounts don’t offer the tax advantages of certain retirement accounts, they provide an opportunity to invest in a broad range of liquid assets, from stocks and bonds to exchange-traded funds. This can be valuable for retirees needing to cover unexpected medical costs without the constraints of early withdrawal penalties.
401(K)
These employer-sponsored retirement plans are powerful tools for retirement savings, with high contribution limits and potential employer matching. Withdrawals are taxed as ordinary income, but funds can compound over time without taxes eroding their growth. This can potentially increase the value of your savings (and the amount you have to put toward Medicare costs) by the time you retire.
Traditional IRA
Like 401(k)s, traditional individual retirement accounts (IRAs) allow pre-tax contributions, which grow tax-deferred until withdrawal in retirement when they are taxed as ordinary income. These funds can be strategically withdrawn in retirement to manage healthcare expenses, such as Medicare premiums. Traditional IRAs can be particularly useful if you expect to be in a lower tax bracket after retirement, as the funds may be taxed at a lower rate, maximizing the value of your withdrawals.
Roth IRA
Roth IRAs are funded with after-tax dollars, meaning withdrawals in retirement are tax-free. This feature can be particularly advantageous for managing healthcare costs as it allows retirees to withdraw funds without increasing their tax burden, potentially keeping Medicare premiums lower since they are tied to income levels.
SIMPLE IRA
Savings incentive match plan for employees (SIMPLE) IRAs are employer-sponsored retirement plans that are simpler and less costly for small businesses. Like traditional IRAs, contributions are pre-tax, so withdrawals are taxed as ordinary income. The funds can be used for any retirement expenses, including healthcare.
529 Savings Plan
Often used to save for a child’s education expenses, 529 plans may not appear related to your Medicare. However, these plans could afford retirees additional financial flexibility to cover their healthcare costs. For example, these accounts offer tax-free growth, meaning investments grow more efficiently and may let retirees dedicate more assets to their healthcare needs than they would’ve otherwise been able to.
How Can Professionals Help?
Choosing Accounts
Financial advisors provide personalized advice on which types of accounts align best with your healthcare and retirement goals. Their expertise can help navigate the complexities of account rules, tax implications, and strategic withdrawals.
Choosing Investments
Additionally, they can help you select the investments to hold in your accounts in a way that fulfills Medicare needs. Their knowledge also ensures you balance risk and reward, an essential factor for retirees, who generally require more stability.
Healthcare Cost Planning
Financial planners with healthcare expertise can offer insights into immediate and long-term healthcare cost planning. For example, retirement accounts require minimum distributions (RMDs) starting at age 73, potentially impacting your Medicare premiums. An advisor can help you manage and plan for these mandatory withdrawals.
Are your investment accounts supporting your healthcare needs? Contact us to learn how a comprehensive financial plan can optimize your retirement savings to manage Medicare costs and secure your financial future.
