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Paying Those Premiums

James McGlynn

I’M 64 AND PREPARING to sign up for Medicare next year. I’ve done extensive research, including earning the Retirement Income Certified Professional designation. I’ve also written articles for HumbleDollar on Medicare coverage, Medicare premiums, Medigap and health savings accounts.

In addition, I’ve befriended Medigap salespeople, advised others on which plans to choose, and asked those on Medicare for advice on their experience with the program. I feel as if I’ve been preparing to take the Medicare filing “exam,” and I’m excited to sign up.

I plan on enrolling in traditional Medicare—Part A hospital insurance, Part B doctor services and outpatient coverage, and Part D prescription drug coverage. I’m also purchasing Medigap Plan G, which will pay for my medical expenses after I’ve met my annual deductible. My planning doesn’t stop there, however.

Once I’m enrolled in Medicare, I’ll no longer be eligible to contribute to my health savings account (HSA). My 65th birthday is next June, so I’ll only be allowed to save in my HSA through May 2024. In 2024, the HSA contribution limit will increase to $4,150 for a solo contributor like me. Because I’m over 55, I can add another $1,000, bringing the annual total to $5,150.

Did you know that allowable HSA contributions are pro-rated in the year you enroll in Medicare? Since I’m only eligible to contribute to the HSA for five months next year, I can contribute 5/12th of $5,150, or $2,145. I’ve got around $25,000 in my HSA already, so my final contribution should bring my balance to around $27,000.

I’m saving all I can in my HSA because it’s arguably the best tax-favored account around. The contributions reduce my taxable income. The account grows tax-deferred. And if I use distributions for qualified medical expenses, there are no taxes owed on my withdrawals.

I’ve learned there’s one drawback to HSAs, however. They’re one of the worst accounts to be inherited by a non-spouse. The entire amount is taxable as ordinary income by the recipient when received. There’s no 10-year distribution period to ease the sting, like there is with inherited IRAs.

For this reason, I’d prefer to spend at least some of my HSA balance earlier rather than later and, indeed, I’m thinking about the period before I file for Social Security at age 70. My Part B premiums and my annual Medicare deductible will both be expenses eligible for tax-free HSA withdrawals. Combined, these should cost me $2,345 in 2024. Unfortunately, Medigap insurance is not an eligible expense for an HSA withdrawal.

The good news is that the Medicare premium surcharges owed by higher earners are considered qualified medical expenses for HSA purposes. Single taxpayers who earned an estimated $102,500 or more in 2022, and married couples who earned $205,000-plus, will be hit with the Part B and Part D surcharge in 2024.

From age 65 through 69, I’ll have to pay my Medicare premiums by writing a check because I won’t be receiving Social Security and hence my premiums can’t be deducted from my monthly benefit. Medicare premiums have been rising around 7% a year, so I expect my premiums will exceed $3,000 a year before I reach 70.

Even if I draw down my HSA by an estimated $15,000 over the next five years, I should have enough left in the account to cover routine medical expenses and, I hope, dental expenses, too. When I file for Social Security, I’ll likely stop paying my Medicare premiums from my HSA. Instead, at that juncture, my Medicare premiums will be deducted directly from my Social Security payments.

After age 70, I could keep track of my annual Medicare premiums or other medical expenses to make further non-taxable HSA withdrawals. Or I could donate the remaining account to charity, so my beneficiaries won’t have to pay ordinary income taxes on what’s left over. But that’s a decision for another day.

James McGlynn, CFA, RICP, is chief executive of Next Quarter Century LLC in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of Retirement Planning Tips for Baby Boomers. Check out his earlier articles.

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