1. HSA Contributions and Medicare
For most people, Medicare takes effect the first of the month you turn 65, unless your birthday is the first of the month. In that case, Medicare takes effect on the first day of the calendar month before your birthday month. Once you enroll in any part of Medicare (Part A, Part B, or Part C), you are no longer eligible to contribute to an HSA. This includes employer contributions to your HSA. If you continue to contribute to your HSA after enrolling in Medicare, those contributions are considered “excess contributions” and are subject to a 6% excise tax.
Do you need to stop HSA contributions before age 65? This depends on when you enroll in Medicare Part A and Part B and pre-planning is recommended at least 6months prior in order to avoid any excess contributions subject to additional taxes.
For additional information, listed below are some available resources:
“Do I have to stop HSA Contributions before my Medicare coverage?”
“Medicare’s tricky rules on HSA after age 65”
2. Retirement Income Concerns for Large IRAs and 401Ks Investment Balances
For most traditional IRAs and 401Ks taxes have not been paid on the contributions to these accounts nor on the growth in these accounts. Taxes are paid when contributions AND earnings are withdrawn in retirement. Required Minimum Distributions (RMDs) could push taxable income into higher tax brackets than in pre-retirement years when coupled with other income sources in retirement
Good investment and tax planning strategies could dramatically reduce taxes in retirement if done prior to retirement or within the first few years of retirement. Strategies like ‘bucket planning,” which involves diversifying retirement savings across different account types (pre-tax, Roth, and taxable), are recommenced to provide more flexibility and control over tax obligations during retirement withdrawals. It may be worthwhile to discuss IRA/401k conversions to ROTH prior to receiving Medicare and/or prior to when RMDs are mandated. Please work with your financial advisor for further guidance on your personal finances.
3. Retirement Income and IRMAA
As part of your discussion with your retirement income discussion with your financial and/or tax advisor it is recommended to look at current and future tax impacts of the financial strategy. This includes discussion on the potential impact from the IRMAA surcharge (income-related monthly adjustment amount) for those with Medicare Part B (medical insurance) and Medicare Part D (prescription drug plan) premiums. This surcharge is a fee that is paid on top of your Medicare Part B and Part D premiums if you make a yearly income above the annual thresholds. IRMAA is based on the income on your tax return two years prior. Currently, the measurement is based on 2023 income and those Medicare beneficiaries with modified adjusted gross income above $106,000 (individual) or $212,000 (joint return) will see a surcharge.
As a reminder, financial and/or tax planning is personalized with no one-size-fits all approach. Consider setting up a meeting to discuss potential tax impacts of retirement income.
Any accounting, business, Medicare or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement is the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.