As many clients know, my girlfriend is in the medical industry. The other day we were having a conversation about treatment & prevention of skin ailments. While treatment must occur for existing ailments, taking preventative action to avoid future illness can save a patient tremendous emotional and financial agita. This made me realize that many times prospective clients come to Innova Wealth Partners in either position, seeking preventative guidance or treatment for an existing financial ailment.
Let’s review some common financial goals and what treatment and prevention look like in each circumstance.
Paying for Healthcare Costs in Retirement
According to a 2021 study by the Bureau of Labor Statistics, for households retirement age and above, healthcare costs ranked as the 3rd largest expense, only behind housing and transportation. Unfortunately for retirees, these expenses can also be ‘lumpy’, meaning retirees can go weeks and months without large costs, then WHAM, a multi-thousand-dollar medical bill hits your wallet.
Treatment – Many retirees utilize their retirement accounts as a safety net to help support surprise costs, like medical bills. Unfortunately, from traditional IRAs & 401(k)s, your healthcare expenses can be accompanied by a tax bill since all distributions from these accounts are considered taxable income. If the funds come from a non-qualified brokerage account, there may be realized gains that result from the sale of securities to provide those funds. Since the medical bill is in hand, the funds are provided, and hopefully this ‘one time’ extraordinary expense does not affect your financial plan.
Prevention – Many clients have grown accustomed to our recommendation of starting a Health Savings Account (‘HSA’) as soon as possible. That means today! You must be enrolled in a health insurance plan that is HSA eligible but once you cross that hurdle, the opportunity is substantial. First, unlike a Flex Spending Account (FSA) the value held in an HSA account can carryover from year to year. Second, any funds in an HSA can be invested to increase the account value over time. When you contribute to an HSA account, you receive a tax deduction AND if the distributions occur to pay a wide range of qualified healthcare expenses, then, unlike a traditional IRA/401k, the distribution is not considered taxable income. This combination allows for clients to save money for future healthcare expenses (including long term care premiums) in a tax efficient manner! There are additional benefits of an HSA account that go beyond this newsletter.
Helping Young Grandchildren Financially
A secondary goal to a successful retirement is helping grandchildren. There are many gifting strategies to achieve this goal, but when a grandchild is still a minor, additional considerations must be given.
Treatment – Without planning, a simple strategy involves gifting cash (under the annual gift tax exclusion – $17,000 for 2023) to parents of young grandchildren for that child’s maintenance and well-being. While incredibly generous, this isn’t a terribly tax efficient strategy.
Prevention – With careful guidance and consideration for tax laws, a grandparent could consider two unique strategies to enhance a grandchild’s life through gifts. First, in lieu of cash, gifting stock with long-term capital gains may allow a grandparent to move funds from their 15-20% long term capital gain tax rate down to their grandchildren. Since most grandchildren don’t earn more than $44,625 (For 2023. This will change for future years), once the stock is received by the grandchild, it can then be sold at a 0% tax rate for use by the grandchild. Second, for a grandchild that is currently earning income, a grandparent can help contribute to a Minor Roth IRA up to the annual contribution limit or annual earned income of the grandchild, whichever is less. This second strategy allows for additional years of compounding tax-free gains to set your grandchildren up for a successful retirement. Yes, earned income by the child is required, but consider a Summer or weekend job of dog walking, babysitting, busing tables at the local restaurant or lifeguarding all potential sources of earned income!
Hopefully you can see from these two examples the increased value that can be created using preventative financial planning rather treatment. Similar strategies can be valuable when considering goals like charitable giving, financing vs owning vs leasing, and tax strategies in retirement, just to name a few.
Many times, a conversation with your financial advisor at Innova Wealth Partners can spur unique planning opportunities!
INNOVA is a SEC registered investment adviser. Information presented is for educational purposes only intended for a broad audience. INNOVA is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed. The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.