Healthcare Expenses and Tax Planning for Those Under 65

Understanding how to manage healthcare costs and optimize your tax situation can make a significant difference to your financial well-being. Here’s what you need to know about healthcare expenses and tax planning to help manage those costs if you are under 65.

Understanding Healthcare Costs

Healthcare costs can be one of the most unpredictable expenses in your budget. Especially if you’re planning for an early retirement, it’s important to consider how you will cover these costs before you become eligible for Medicare at age 65. Here are some points to consider:

1. Health Insurance Options: Without employer-sponsored health insurance, you will need to explore other options, such as purchasing insurance through the Health Insurance Marketplace, enrolling in a spouse’s plan, or opting for COBRA coverage if you recently left a job. Each option has different costs and benefits that need careful evaluation.

2. Premiums and Out-of-Pocket Costs: Besides monthly premiums, be aware of deductibles, copayments, and out-of-pocket maximums. These expenses can add up, so it’s important to budget for them in your retirement plan.

3. Health Savings Accounts (HSAs): If you have a high-deductible health plan (HDHP), an HSA can be a powerful tool. Contributions to an HSA are tax-deductible, and withdrawals for qualified medical expenses are tax-free. Additionally, HSAs can act as supplemental retirement accounts, with funds growing tax-free over time.

Tax Planning Strategies

Tax planning can help manage healthcare expenses. Here are some strategies to consider:

1. Deducting Medical Expenses: You can deduct medical expenses that exceed 7.5% of your adjusted gross income (AGI). These include premiums, out-of-pocket costs, and other qualified medical expenses. Keeping detailed records of your medical expenses will help you maximize this deduction.

2. Utilizing Tax-Advantaged Accounts: Consider using flexible spending accounts (FSAs) if available. FSAs allow you to set aside pre-tax dollars for medical expenses. While FSAs typically have an annual use-it-or-lose-it rule, some plans offer a grace period or allow you to carry over a limited amount of unused funds.

3. Managing Income Levels: Your income level can affect your eligibility for certain tax credits and deductions, such as the Premium Tax Credit for health insurance purchased through the marketplace. By managing your income through retirement account withdrawals and other strategies, you can help optimize your tax situation.

Planning for Early Retirement

If you’re considering early retirement, you need to plan carefully so you have adequate healthcare coverage and a solid tax strategy. Here are some additional tips:

1. Estimate Your Healthcare Costs: These include premiums, out-of-pocket expenses, and long-term care costs. Knowing these numbers will help you create a realistic budget.

2. Build a Health Care Fund: Consider setting aside funds for healthcare expenses. Having a dedicated fund can give you peace of mind and help you avoid tapping into your retirement savings.

3. Review Your Plan Annually: Healthcare costs and tax laws can change, so it’s important to review your plan annually. Adjust your strategy as needed to stay on track and take advantage of new opportunities.

When to Work with a Financial Professional

Navigating healthcare expenses and tax planning can be complex, especially if you’re planning for early retirement. Working with a financial professional can provide valuable insights and help you develop a comprehensive plan tailored to your situation. A financial advisor can:

• Help you understand your health insurance options and choose the best plan for your needs.

• Provide guidance on optimizing tax-advantaged accounts like HSAs and FSAs.

• Assist with estimating healthcare costs and building a robust healthcare fund.

• Offer strategies for managing your income to maximize tax benefits.

• Keep you informed about changes in tax laws and healthcare regulations that could impact your plan.

Final Thoughts

Planning for healthcare expenses and optimizing your tax situation are critical components of a successful early retirement plan. By understanding your options, utilizing tax-advantaged accounts, and working with a financial professional, you may feel confident that you can meet your healthcare needs without jeopardizing your financial security.

Schedule a complimentary, 15-minute chat with a fee-only, fiduciary financial advisor today to discuss your personal situation.

This material was written in collaboration with artificial intelligence (ChatGPT) derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.

Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor with offices in Granite Bay and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.