The Secret Retirement Account That Is Hiding in Plain Sight

Medical care is one of the highest expenses in retirement. There is a way for you to save funds for these costs with a triple tax benefit. You do not get taxed on the money you contribute to your Health Savings Account (HSA), on the money you withdraw from it to pay approved medical expenses, or on the earnings the account generates. You also do not have to use the money in the account, until you choose to do so.

Do not confuse Health Savings Accounts (HSAs) with health care flexible spending accounts (FSAs). The two main differences between HSAs and FSAs are:

  • You can keep thousands of dollars in an HSA for years, even decades. You cannot do that with an FSA.
  • Unlike an FSA, you can invest the money in your HSA into mutual funds, so the account has a possibility for long-term growth and earnings.

HSAs in a Nutshell

You cannot get an HSA account as a stand-alone plan. You have to enroll in a high-deductible health plan that is eligible for HSA accounts. As of 2019, a high-deductible is at least $1,350 for individual coverage and $2,750 for family plans. Once you enroll in an eligible high-deductible health plan, here is what you need to know:

  • The contribution limit into your HSA is $3,450 in 2019 (combined contributions from you and your employer) for an individual plan and $6,850 for a family plan. If you are 55 or older, you can put an extra $1,000 into your account this year. Covered spouses can add an additional $1,000 to their accounts.
  • You usually cannot have both an FSA and an HSA.
  • Your contributions to your has, have to stop when you enroll in Medicare – any kind of Medicare package. The HSA funds can pay your Medicare premiums, but not your Medigap coverage.
  • If your employer does not arrange an HSA provider, you can open an HSA at the provider or your choice. Fees vary, so comparison shop for the best rates. Optum Bank and HealthSavings Administrators are two well-known HSA providers.
  • You do not have to leave the money in your HSA account. You can pay current approved medical expenses with your HSA account.

HSAs Are Not for Everyone

HSA accounts have unmatched tax savings potential, but these accounts are not a good choice for everyone. If you have chronic health issues or young children, you might do better off with a traditional form of health insurance like a PPO, instead of a high-deductible health plan. You should not delay getting medical care to keep the funds in the HSA.

It is probably not the right time for you to open an HSA, if it would cause you financial stress. You should use a comparison calculator to decide which health care plan is best for you and your family.

When you eventually withdraw money from your HSA, you must use it for approved medical expenses to avoid getting taxed on the funds. It might be your money, but once it goes into an HSA, the government puts restrictions on how you can use it. Be sure to save all receipts for medical expenses you paid with HSA funds.

References:

AARP. “Your Secret Retirement Investment.” (accessed June 12, 2019) https://www.aarp.org/retirement/retirement-savings/info-2018/health-savings-account-retirement-planning.html

Suggested Key Terms: health savings accounts, long-term savings in HSAs, tax benefits of HSA accounts, how HSAs are different from FSAs

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What Do I Need to Know About Special Needs Trusts?

One of the hardest issues in planning for a child with special needs, is trying to calculate how much money it’s going to cost to provide for the child, both while the parents are alive, and after the parents die.

A recent Kiplinger’s article asks “How Much Should Go into Your Special Needs Trust?” As the article explains, a special needs trust, when properly established and managed, lets someone with a disability continue getting certain public benefits.

Even if the child isn’t getting benefits, families may still want the money protected from the child’s financial choices or those who may try to take advantage of them. A trustee can help manage the assets and make distributions to the child with special needs to supplement his lifestyle beyond what public program benefits provide.

A child with special needs can have multiple expenses, and the amount will depend on the needs and lifestyle of the family and the child’s capabilities. One of the biggest unknowns is the cost of housing. If the plan is for the child to live in a private group home-type situation, there are options. Some involve the purchase of a condo in a building with services for those with special needs. Many families also add into the budget eating out once a week, computers and phones and other items.

When the parents pass away, this budget will need to increase, because what the parents did for their child must be monetized.

Fortunately, public benefits can usually offset many of the basic costs for a child with special needs. For example, the child may be eligible for Supplemental Security Income (SSI), as well as a Section 8 housing voucher and SNAP food assistance. When the parents retire, SSI is typically replaced with Social Security Disability Insurance (SSDI), which is one-half the parent’s payment.

When the parent dies, this payment becomes three-quarters of that amount. Adult Family/Foster Care may be available. That will depend on the group housing situation.

The child may also be working and bringing in additional income (minus whatever benefits may be offset by this income).

It’s vital to do a complete analysis of the future costs to provide for a child with special needs, so parents can start saving and making adjustments in their planning right away.

The laws on this planning may vary from state to state, so be sure to contact an experienced elder law attorney.

Reference: Kiplinger (June 10, 2019) “How Much Should Go into Your Special Needs Trust?”

Suggested Key Terms: Elder Law Attorney, Special Needs Trust, Disability, Supplemental Security Income, SSI

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The Dark Side of Reverse Mortgages

Reverse mortgages have gone through different stages of popularity over the years. They are now tightly regulated and are growing in use, as seniors find themselves strapped for cash. However, there are still pitfalls, says Arizona Central in the article “Reverse mortgages can cause problems when spouses, heirs aren’t on board.” The problems can come, when the details are not clearly understood by family members.

The reverse mortgage lets an owner tap into the equity in their home. They receive income, but the loan does not have to be paid back, until the owner either dies or moves out permanently. One issue occurs when the homeowner either dies or must leave the home for health or other reasons. The person or a family member must pay the entire amount that was borrowed or sell the property to satisfy the loan, usually within a very short period of time, such as six months.

That can put surviving spouses and heirs in a bind. If the surviving spouse needs to stay in the house, or family members haven’t planned to leave the house, they can end up facing eviction notices and legal challenges from the mortgage company.

There may be conflicts, if family members did not know there was a reverse mortgage or if they weren’t told that they might have to move.

This is just one reason why anyone considering taking a reverse mortgage should explain what they are doing with their spouse, family members and estate planning attorney. The family must be prepared for what may follow and be sure it makes sense to go forward with a reverse mortgage.

One family thought their two brothers were going to inherit a home owned by their mother, based on a living trust that she had drafted. However, years after she took out a reverse mortgage on the property, she moved to an assisted living facility, where she died. The changes in the home occupancy caused the lender to seek repayment and then evict one of the brothers who was living in the home.

Spouses may think they are allowed to live in the home after the borrower dies or moves out for other reasons, but that doesn’t always work out as planned.

One woman was not listed as a co-borrower on the reverse mortgage, because she was not 62 when her husband took out the loan. She had to retain an attorney to fight back against threatening letters and phone calls, after the death of her husband.

The federal Department of Housing and Urban Development, known as HUD, changed the rules for reverse mortgages in 2014. HUD provides insurance for reverse mortgages. The rule change ensures that a spouse may stay in the home, even if not listed as a co-borrower, subject to certain requirements.

Heirs must pay back the loan after the borrower dies or permanently leaves, and this has left more than one family in a bad place, especially if the house is in disrepair and must first be readied for sale.

While the reverse mortgage has some downsides, there are also benefits. Taking out a reverse mortgage allows the borrowers to refrain from taking assets from their retirement accounts, and if families have large unrealized gains on their property, they can tap the money without needing to sell the property.

Talk with your estate planning attorney, before applying for a reverse mortgage. They will be able to provide an objective viewpoint about the pros and cons, so you and your family will be ready for what may come in the future.

Reference: Arizona Central (June 12, 2019) “Reverse mortgages can cause problems when spouses, heirs aren’t on board”

Suggested Key Terms: Reverse Mortgage, Nursing Home Care, Retirement Accounts, Heirs, Estate Planning Attorney, Retirement Accounts

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