Health Benefits time:How to Get Entirely Tax-Free Retirement Income?

Seen this in WSJ, sharing for information. I have not used it, trying it this year enrollment, no in depth knowledge.

If you are using, please provide feedback, that helps.

How to Get Entirely Tax-Free Retirement Income

If used wisely, HSAs give savers a triple benefit–pretax deduction, tax-free growth, tax-free withdrawals
When it comes to saving for retirement, I now use two accounts: My 401(k) and a health-savings account.

Many people overlook HSAs as a retirement-savings vehicle because they are typically used to pay current medical bills. But these accounts, which Congress authorized in 2003, come with more tax advantages than 401(k)s and individual retirement accounts when used to cover medical costs—whether now or in retirement. And there are ways to use them to create tax-free income in retirement.

Saving for medical costs makes sense given that they are a major expense in retirement. A 65-year-old couple who retires today and has no reason to expect an early death will need about $265,000 to have a 90% chance of having enough for Medicare premiums and the 38% of medical costs Medicare doesn’t cover, according to the nonprofit Employee Benefit Research Institute. (That amount doesn’t include dental and long-term-care expenses.)

The HSA “is the most tax-favored savings vehicle in the tax code,” says Leo Acheson, a senior analyst at Morningstar Inc. who wrote a recent report about HSAs.

As with a traditional 401(k) or IRA, an HSA allows you to set aside money without paying federal or state income taxes on it. Money in HSAs grows tax-free and, if used now—or later—for medical expenses, can be withdrawn tax-free. In contrast, with a traditional 401(k) or IRA, income tax is paid on withdrawals. (Alabama, California, New Jersey and New Hampshire don’t provide a state tax deduction for HSA contributions and Alabama, California and New Jersey also tax HSA earnings.)

Because of the HSA’s triple tax advantage—the upfront tax deduction, tax-free growth and tax-free withdrawals for medical expenses—experts recommend that those who can afford to contribute to both an HSA and a 401(k) kick in the maximum to both.

For a 401(k), the current annual limit is $18,000 for people under age 50 and $24,000 for older investors—numbers that will rise to $18,500 and $24,500 in 2018. The annual caps for HSAs are $3,400 for individuals and $6,750 for families in 2017 and $3,450 and $6,900 in 2018—with those who are 55 or older permitted to kick-in an extra $1,000.
Those who can’t afford to put the maximum in both should first allocate enough to their 401(k) to get the company match and then switch to the HSA (and later return to the 401(k) if they can save more), experts say.

To open an HSA, you must be covered by an HSA-qualified health insurance plan. Among other things, the plan must have a deductible of at least $1,300 for individuals and $2,600 for a family, thresholds that rise to $1350 and $2700 in 2018.

I signed up for such a plan in 2016. To help build a buffer against my plan’s $6,800 out-of-pocket spending cap for in network services, including a $2,800 deductible, my company deposited $500 into my HSA. I put in the $1,300 I saved on premiums by using the high-deductible plan instead of the conventional plan. Eventually, I added $2,050 more because I wanted to make the maximum annual contribution allowed, which, for individuals, was $3,350 in 2016. In 2017, I contributed the $3,400 individual limit. The biggest payoff with an HSA comes when the money set aside isn’t used for current medical bills and instead compounds over time for use in retirement, says Rob Austin, director of research at 401(k) record-keeper Alight Solutions LLC. “The longer you let HSA money grow, the more valuable it becomes.”

To see why, consider my approach: For the sake of a simple, round number, let’s assume I have a $75,000 salary. That means that after paying federal income tax at a 25% rate, New York state income tax at a 6.45% rate and FICA tax (which finances Social Security and Medicare) at 7.65%, I get to keep 61 cents of each additional dollar I earn—not great.

By saving in an HSA, I can shelter all 100 cents of every additional dollar I earn from taxation forever, assuming I use the money for medical bills.

Due to the HSA’s extra tax advantages, each dollar I put into my account will turn into $2.19 after 20 years, assuming a 4% annual inflation-adjusted return, according to Vanguard Group By contrast, the same dollar will be worth just $1.64 after I take it out of a traditional 401(k) in two decades and pay income taxes on the withdrawal. (The example assumes a 25% federal income-tax rate and ignores state tax.)

In an HSA, “savings can compound to produce higher returns than those available from other accounts,” said Maria Bruno, senior investment strategist at Vanguard.

Even if I decide to tap my HSA to cover current medical bills, it is still worthwhile to contribute, said Roy Ramthun, a consultant who specializes in high-deductible plans and HSAs. The reason: The upfront tax deduction allows me to keep the 39 cents per dollar I would otherwise have had to pay in taxes.

To withdraw money tax-free from an HSA, you have to use it for qualified expenses. Those can include not just medical bills but also dental and vision-care expenses, premiums for all types of Medicare plans except for Medigap, and a portion of long-term-care insurance premiums.

If you use your HSA for nonmedical expenses, you will owe income tax on your distributions—and a 20% penalty if you are younger than 65.

If you are organized and stockpile receipts for past medical costs you paid out of pocket since establishing the HSA, you can file for reimbursement in retirement. Doing this will allow you to supplement your retirement income tax-free in years in which tapping other accounts would push you into a higher tax bracket or expose you to higher Medicare premiums.
“You could conceivably buy a boat or motorcycle with HSA money if you have receipts for qualified medical expenses” you paid out of pocket in the past that are equal to the purchase price, said Eric Remjeske, president of Devenir Group LLC, which advises banks offering HSA investment platforms.

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Same here ----- signing up this year for family. I had this account in 2007 when I was married no kids. Unfortunately i had to take a ambulance ride to the hospital and was out of $2k in hospital fees for a bottle of saline drips :). Incident free for teh last 10 years ----- taking the plunge again.

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If I am not visiting hospitals, whether the deductible $1300 (or $2600) is lost for that year?

It says “The biggest payoff with an HSA comes when the money set aside isn’t used for current medical bills and instead compounds over time for use in retirement”.

If I contribute max $6800, how does the money grow?

What u put in HSA is rolled over - u dont lose it. Deductible resets every year. For HSA u can invest money in etf - thats how it grows. However the admin fee maybe high. My plan charges 0.4% if u invest + etf expense ratio

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The biggest drawback is you need to have a high-deductible plan to be eligible for a HSA. The HSA works similar to a 529 for college. I prefer to have a PPO, so I don’t quality to have the HSA.

Any planning ends the day you get real sick, can’t go to work anymore, you have to depend on family to move around, your savings start to get depleted by a disease or physical impairment. You become the third squeaky wheel nobody wants to grease.

Most people have long-term disability coverage which pays at least 66% of your base pay. I’ve been able to upgrade to 75% in the past for a few dollars a month. I’ve never had an employer that didn’t provide long-term disability coverage.

Honestly, it doesn’t pay to have money when you get super sick anyway. My grandpa had a GM pension and social security. Assisted living took almost all of it to cover the bills. Other people paid almost nothing, because medicare covers the medical bills and medicaid covered the rest.

It’s called “spend down”. Open your check book sir, the enema is coming!

Yes, I use those. As long as we work with any company, we are fine with long-term disability coverage.

I am thinking of HSA as a means for savings taxes now (25%+9.3%), and using those tax saved money for future, after retirement, medical expenses. If I have 15 years HSA ($3450+1000)/year, it will be $117450 (appx 115k) at the growth rate of 7% for single person. Effective tax saving is appx $49719 (appx 50k).

I am still not clear (confused) how this works.

These are small savings we will never know the pinch of it. Above all, company also matches some amount for employee (free money).

Do you currently have a high-deductible healthcare plan? If not, you’ll have to switch to one to be eligible.

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buying house,

My AIA insurance agent told me only poor guys need to buy insurance.
Rich guys should just invest their monies in stocks.
True or false? Why?
I followed his advice and stopped paying the premium for life insurance and let the insurance paid itself… yes, you can stop paying and insurance still in force. Bought those life insurances when I was just out of college and when I got kids in the early days of marriage. Currently, have medical and dental insurance plan only.

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True, but u can use it to pay for healthcare premiums when you retire or don’t have employer sponsored health insurance. Medicare is not free - its means tested(part B). With bay area salaries and assets be prepared to dish out for medicare premiums.


term life is so cheap. Not sure how you can make up for insurance amount by saving on premiums. You don’t have auto liability insurance? Handicap one techie in bay area during your commute and you are screwed!

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Forgot about that one. Is compulsory to have one. Also have homeowners’ insurance and umbrella policy :slight_smile:
Basically just drop the life insurance :slight_smile: and all those compulsory ones are still around.

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Thanks for the comment Hanera. Do I need to say you had a term insurance? Or, if you had one called “death insurance” that at that time were issued without any living benefits, that is, you die, they pay. You get sick, good luck! :smiley:

I have said many times I don’t force anybody to take my word nor to apply for a life insurance. I’ve seen personally, 2 cases were one person dismissed to even buy a term policy, he went flying and above the sky he had a heart attack. Gone at 27 years old. Then, one of our agents, client at that time, 70+ years old got her and her husband a policy. 2 months later husband was diagnosed with cancer stage 4. He got $370K immediately, spent some $Ks on some surgery and whatnot, he is cured now. They don’t miss that policy for him anymore, it already gave them a life saving passport. She is our agent now, very proud of represent a product that save them from BK.

We have clients putting $10K + a month into IULs. I don’t consider them poor. Ask what’s his name, the ex 49ers couch, Jim Harbaugh? His payment for coaching for a university was in whole life insurance. Tons of money he will make, he doesn’t need money, he has lots of it saved so he is going to retire with $ millions a year. Nice, right?

OK…a case for you.

Look at the illustrations below.

Pay attention to the numbers highlighted in yellow. The premium and the cash surrender value, or what you can loan immediately but the number reflects the amount loaned annually, illustrations can’t run month by month.

Last week, I had this young lady, 26 years old, lots of money to make. She told me she wanted to save about $1K every month for her retirement. I explained her about real estate, stocks, and whatnot. She didn’t budge on anything. Her dad owns bunches of RE, businesses, homes, etc. She gets bored by talking about money. Her dad gave her to run some errands, she spends, he reimburses her at the end of the month. The expenses are about $2,800, so out of boredom she told me just to have fun with those expenses. She will put $600 out of her pocket.

So, we planned on opening the following policy for her.
Illustration running at about 7% return. We have returns of 14%-16%.
There’s a cap of 12.5% on this policy. That’s all you are going to get.

Age= 26, Female

Premium: $3400 a month = $40,800 annually
Loan every month (never paid back): $2800 x 12= $33,600 annually. But we have $34,936 that can be loaned?
Premium a month: $600 out of pocket. But, basically she is paying $488.
Why? You have $40,800 then you subtract the cash value of $34,936, it gives you $5,864 divided by 12= $488

She is already earning some money, right?

Follow me? OK
She will stop contributing at age 59-60.
Annual income at age 60: $424,742 every year, it stops at age 120. TAX FREE! :money_mouth_face::money_mouth_face::money_mouth_face:
Face amount for her beneficiaries if she dies right now, 2 kids and husband? $2,010,143 M
Death benefit to her beneficiaries minus the loans= $6,688,824 M
Terminal illness: $1,386,231 lump sum if she gest sick a month after signing the policy.
Chronic illness: $27,443 per month for 50 months.
Critical illness benefit: $921,767 lump sum.
Critical injury benefit: $921,767 lump sum.

So, where can you buy a property for $488 a month, or for a total of $199,104 (30 years, not lump sum) that is going to give you an annual income of $424,742 for the rest of your life after age 60?

Don’t forget, she is supposedly, allegedly going to loan $2,800 every month, such loan is never paid back, unless you want the $6M to be paid to your beneficiaries.

And, of course, this is not guaranteed, the market can go higher, or Kaput as in 2008-2009 so the policy holder gets to earn 0% but the cash value is never lost. It is an indexed policy, I hope you know how good that is.

Oh…this is a flexible policy. She can just pay $600 every month or less, her policy will not lapse. She will keep all the benefits.

No offence, but sounds like her dad is her best life insurance policy.

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Life insurance is not necessary if you have enough assets to cover living expenses of the people you leave behind, at least for the 3 to 5 years until things stabilize. That includes PITI of your house. So if your house is free and clear there goes one big reason for having life insurance.

Also if you are not the bread winner there is little reason to buy.

Term life is cheap if it’s offered as a benefit from employer. But the amount is usually tiny. If you have to buy it for yourself it’s not that cheap.

Yes, I wish I could have a mom or dad like that, what the heck! A grandma or grandpa like that can adopt me :sweat_smile:
Remember, she told me out of fun to open that policy. But, just think about it, it is not bad getting an income of $400K a year, tax free when you are 60 years old. It could be more or less, but still, tax free.

She is using the expenses her dad suffers while she is running some errands. And this is the part some people here don’t understand. They think this girl’s cost of insurance is $3,400 a month. It’s $600 < > !

By year 10, $100 goes in, $100 is loaned out.

Thanks for giving an opinion.

First, what is rate of interest for this loan? In your illustration, the interest or cumulative interest is hidden or the impact is not explicit.

No one will give such loan interest free for life until 60 !

With such face value, the insurance industry will be bankrupt in few years.

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The illustrated loan rate is there, on the top right hand corner, above the green. I had to hide some critical information.

The illustration is made to reflect such charges, the net death benefit is increased yearly so the loans can be deducted from it. It is all about a magic word “math”. It is based on the law of large numbers, not everybody dies, some do, others don’t for a while. Like car insurance, we pay into a pool.

This is one of the oldest insurance company in the US. And what you doubt, it is all OKd by the state and government. Every insurance company has a reserve fund with the state, and the state is very vigilante about it, at the first signs of stress they either take over, make other company buy it or a group of reinsurers take over.

These insurance companies play with the premiums using call options. You know that, don’t you? Believe me, they never lose and $1 is turned into thousands.

Now, I consider you a savvy, smart guy, no doubt about it. I believe you are a self-taught individual and as an immigrant it makes me proud to see you succeeding. OK…close your eyes, and visualize this:

Count all the money that has passed for your hands. No, wait, for your bank. Every time you sold a property the money went to your bank account, then your wages, rents, etc. Just by counting your expenses you can have an idea of how much you have used your own money, not OPM, other people’s money. How much?

Then, put aside 20%-25% of it to pay for your cost of insurance. Now, if they are millions or not, imagine an 8% compound earnings on that money for how many years now? I can run an illustration with such numbers, I only need your age. This is a flexible policy, you can choose among 5 strategies. I used 4 of them, the most profitable for this illustration but the client can change that every year.

Just remember, look at the illustration, by year 10 you are loaning more than what your premiums are.

We have had people with $120K premiums per year, first time, they wait 30 days to pull up to 80% < > and the year is all paid for, but they have that 80% earning good returns. Second year/month they only wait 7-10 days to loan their 80% or so. Then, they do it for the next and the next year for about 5-8 years and stop contributing. They will receive tons of income when they retire.

I hope I didn’t confuse you. Not that good to explain it in English. :scream: