Retirement Health care premiums


J

jIM

I have a general question for retirement spending and tax planning.

Assume someone retires around age 50-55, with assets in a mix of
taxable accounts, Roth accounts and tax deferred accounts.

If person has to pay health care premiums, my understanding is these
would be considered "pre-tax" items- the premiums lower taxable
income. I am curious how this works on three levels.

1) Assume a 72(t) is used to fund the early retirement including
health care premiums, and some taxes are paid from the 72t. Is the
entire 72t withdraw for the year taxable? Then at income tax time
some of this is "returned" to tax payer because the health care
premium lowered taxable income?

2) can the health care premiums get paid from a rollover IRA, prior to
age 50, without tax or penalty (because the payments are for
healthcare).

3) Is it better, worse, or indifferent to use monies in a taxable
account to pay the health care premiums. There is a part of my mind
suggesting the rollover IRA has never been taxed, and the health care
premiums are not taxed, so that is best use of money. But if the tax
return is where the tax savings is actually seen, might be a moot
point where the premiums for health care are paid out of.

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T

Tad Borek

jIM said:
Assume someone retires around age 50-55

If person has to pay health care premiums, my understanding is these
would be considered "pre-tax" items- the premiums lower taxable
income. I am curious how this works on three levels.

1) Assume a 72(t) is used to fund the early retirement
Jim, health care premiums are truly pretax only when paid through your
employer. If you pay them out of pocket, they land on Schedule A
(Itemized Deductions) as a medical expense, which is a category that has
a 7.5%-of-AGI floor. For many people, this makes them only partially
deductible, or even not at all (e.g. if you still take the standard
deduction).

If you have self-employment income (coaching as I recall?), and you
aren't eligible to participate in a health plan through your spouse's
employer, you can take an "above the line" deduction on line 29 of Form
1040. Unlike medical expense/itemized deductions, this isn't subject to
any AGI floor, but you can only deduct premiums to the extent you have
self-employment income. You'll still pay self-employment tax on the SE
income, which isn't the case for health insurance paid through an
employer. So it's not entirely "pretax" even for the self-employed. This
is actually an improvement, just a few years ago health insurance wasn't
fully deductible for the self-employed.

So depending on your overall tax picture they may be fully deductible,
or not at all. With just IRA income from 72(t) they'd go on Schedule A.

-Tad

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M

Mark Bole

jIM said:
I have a general question for retirement spending and tax planning.

Assume someone retires around age 50-55, with assets in a mix of
taxable accounts, Roth accounts and tax deferred accounts.

If person has to pay health care premiums, my understanding is these
would be considered "pre-tax" items- the premiums lower taxable
income. I am curious how this works on three levels.
Actually, it doesn't work at all. The only time health insurance
premiums would be fully deductible (pre-tax) is if they were provided
under an employer plan, or if you are self-employed and not eligible to
be covered under an employer plan for you or your spouse.

Otherwise, the best you can hope for is to deduct only the amount of
premiums over 7.5% AGI, and only if you itemize deductions. Even
medicare premiums paid out of Soc. Security, and High Deductible Health
Plan (HDHP) premiums in conjunction with an HSA (Health Savings
Account), are subject to these limits. Even the exception for early
withdrawal penalties in an IRA to pay for health insurance is subject to
7.5% AGI, and it's still fully subject to ordinary tax.

Where did you get the idea that there would be no tax on income used to
pay health care insurance premiums? Perhaps some background would help
to clarify the misunderstanding.

-Mark Bole

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J

jIM

Where did you get the idea that there would be no tax on income used to
pay health care insurance premiums?  Perhaps some background would help
to clarify the misunderstanding.
Tad nailed it- I assumed because health care was pre-tax on my
paycheck that is was pre-tax in retirement too.

That's why I ask questions, to make sure I understand what is (or is
not) possible.

thx

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E

Elle

jIM said:
2) can the health care premiums get paid from a rollover
IRA, prior to
age 50, without tax or penalty (because the payments are
for
healthcare).

3) Is it better, worse, or indifferent to use monies in a
taxable
account to pay the health care premiums. There is a part
of my mind
suggesting the rollover IRA has never been taxed, and the
health care
premiums are not taxed, so that is best use of money.
I read this and thought maybe you were contemplating a
strategy using a Health Savings Account, as follows:

1.
Get a high deductible health insurance plan that qualifies
under HSA rules.

2.
Take money out of your Trad IRA for medical expenses,
including health insurance premiums. You will meet the
exception for no penalty. But so far, you are stuck paying
taxes on the distribution, per line 15 of Form 1040.

3.
Put money into Health Savings Account. For a family,
currently up to $5800 is deductible each year on line 25.
This will cancel out some or all of the Trad IRA
distribution you have to report as income, so the net effect
is you pay no taxes on the distribution.

4.
Also, one time only, a person can roll money directly from a
Trad IRA to an HSA, limited to one year's maximum allowed
HSA contribution.

The money you stowed in the HSA can be tapped after your
Traditional IRA money is gone. You pay no taxes on HSA
withdrawals, as long as they are for qualified medical
expenses. You can invest in the HSA any way you want.

I would check the IRS rules further before doing this. Or no
doubt someone here might poke a hole in it.

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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
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M

Mark Bole

Elle wrote:
[...]
2.
Take money out of your Trad IRA for medical expenses,
including health insurance premiums. You will meet the
exception for no penalty.
Only for the amount above 7.5% of AGI.
4.
Also, one time only, a person can roll money directly from a
Trad IRA to an HSA, limited to one year's maximum allowed
HSA contribution.

Good point. Still doesn't help with health insurance premiums, though.


-Mark Bole

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E

Elle

Mark Bole said:
Only for the amount above 7.5% of AGI.
Assuming unreimbursed medical expenses exceed 7.5% of AGI,
then you mean there is no penalty on that part of the Trad
IRA distribution equal to [Actual Med Expenses - 7.5% AGI].

Or put another way, a 10% penalty is imposed on [TIRA
distribution - (Actual Med expenses - 7.5% AGI)].

If this is what you meant, you are right. I could not figure
out what you were saying without laying it out like this.

And to be clear (not to you, since I think you know this,
but for the archives), one does not have to be able to
itemize deductions to use this exception to the penalty rule
for early IRA distributions.
Good point. Still doesn't help with health insurance
premiums, though.
You are right, though I expect with kids the dental and
other medical costs could add up, though.

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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
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