Medicare Medical Savings Account Plans (2007-11-26)

Medicare Medical Savings Account Plans

by David John Marotta

Medicare Medical Savings Account (MSA) Plans are one of the newest Medicare Advantage Plan options. Private companies began offering these accounts in 2007. Like Health Savings Accounts, a Medical Savings Account puts you in control of your own health care dollars.

If you are in good health and want to limit the maximum you would need to pay in a medical emergency, you may want to consider a Medicare Medical Savings Account plan during your retirement years.

When you choose a Medicare MSA plan, you are still participating in one of Medicare's plan options. A Medicare MSA plan is a "Medicare Advantage Plan," also known as Medicare Part C.

A Medicare MSA has two parts: a medical insurance plan and a savings account. The medical insurance portion is a high-deductible health care plan which covers your medical expenses only after you have met a high out-of-pocket deductible. But before you receive coverage, you'll have to pay all of your health costs until you reach your deductible. However, to help you pay the out of pocket costs, the Medicare deposits money into your savings account each year. You can use this money to pay your health care costs before you meet your deductible.

To purchase the Medicare MSA coverage, you probably won't have to pay an additional premium. In keeping with the Medicare Advantage Plan system, you'll simply have to pay the Medicare Part B premium. The costs of Part B are dependent upon your yearly income. In 2008, seniors will pay a monthly premium of $96.40 per person if they are married filing joint and reported $164,000 or less in income ($82,000 for single filers). Monthly premiums climb as high as $238.40 if you are in the highest income bracket.

With a Medicare MSA, you can keep all the money you don't spend on health costs. In fact, you may do better than break even each year. The annual amount you are given will not cover the gap until you meet your deductible. But if you spend less than the amount you are given, your account could grow in size. You may be able to accumulate enough money in your account to cover all of your health care costs up to the amount of your deductible. And like a true savings account, anything you don't spend one year carries over to the next. With an MSA, it's your money.

As an example, the Anthem MSA plan in Virginia has an annual deductible of $3,000 and an annual deposit $1,300. In short, you pay all medical costs up to $3,000. But to help you cover those costs, Medicare will deposit $1,300 at the beginning of the year into your medical savings account.

If you don't need all of your savings for medical expenses, you can spend your account on what you do need. Withdrawals for Medicare covered expenses are tax-free and count toward your deductible. Withdrawals for qualified medical expenses that are not Medicare covered (such as dental, vision and prescription drugs) are tax-free but do not count toward your deductible.

Qualified expenses may also include items which may or may not count toward your deductible. The IRS has approved a long list of qualifying expenses. In addition to doctor's visits, hospitalizations, lab tests and the like, the list also includes prescriptions, some over the counter drugs, vision and dental costs.

You can withdraw and use a portion of the money in your Medicare MSA for non-medical reasons (such as groceries and utilities) without penalty. You will still need to pay income tax on non-medical withdrawals, just as you would with a traditional IRA. The limit you can withdrawal without penalties is equal to your account balance on December 31st of the prior year minus 60% of your policy's deductible. Withdrawals above that for non-medical expenses will be taxed as income and slapped with an additional penalty.

A Medicare MSA can also be a good solution if you have very high out-of-pocket costs under your current Medicare program. Unlike the plain vanilla Medicare Part B which could leave you paying 20% of all your medical costs --with no limit, a Medicare MSA account caps your liability. Once you've met your annual deductible, your insurance plan will cover 100% of your Medicare-covered health costs.

Consumer-driven health care plans may help shape consumer behavior and keep health care costs from spiraling out of control. Contrast Medicare MSA plans with other Medicare Advantage Plans. Generally HMOs pay for medical services. Doctors dictate which services are given, and patients are the ones who actually benefit from these services. With Medicare MSA plans, consumers pay, dictate and benefit from services. They are empowered to make their own healthcare decisions.

Those covered by a Medicare MSA plan should be more likely to engage in healthy behaviors and to get annual check-ups. They should also be more likely to inquire about costs and less likely to consume health care they don't need. If this sounds like you, you may be a good candidate for a Medicare MSA.

Medical Savings Accounts offer you the opportunity to take more control of your health care spending. The money you save on your medical expenses is really yours and can be used to pay whatever bills you might have in retirement, even if those bills are not Medicare covered expenses.

Enrollment in a Medicare MSA is limited to one percent of Medicare recipients on a first come first serve basis. If you are interested, I suggest you sign up early. Open enrolment for Medicare MSA plans begin November 15th and ends December 31st every year.

from http://www.emarotta.com/article.php?ID=258

How Medicare Works (2007-11-19)

How Medicare Works

(2007-11-19) by David John Marotta and Beth Anderson Nedelisky

Many seniors look forward to saving on medical insurance costs by enrolling in Medicare at age sixty-five. However, navigating the Medicare system is not for the faint of heart. Medicare is an alphabet soup of plan choices. Currently Medicare is organized as parts A through D.

Medicare Part A provides hospital insurance to seniors. For the majority of seniors who have paid into the plan, enrolling in Part A comes at no cost. Part A covers hospital stays, home health care services, and hospice care. However, if you just need a check up, you'll need to resort to Part B or Part C to help with those costs.

Part B helps to cover doctor's services, some outpatient care, and routine preventative services. However, unlike Part A, you'll have to pay a monthly premium to buy the coverage. The costs of Part B are dependent upon your yearly income. In 2008, seniors will pay $96.40 per month if they were married filing joint and reported $164,000 or less in income. Monthly premiums climb as high as $238.40 if you report lots of income in retirement.

However, unlike Part A, Part B may require you to first pay the $135 deductible before Medicare will pick up the tab. For other services, Medicare will cover 80 percent of your medical costs, requiring you to pay the other 20 percent. Still in other cases, you'll wind up paying both the $135 deductible plus 20 percent of the remaining costs.

Don't try and save a few bucks by skipping Part B coverage. If you fail to enroll in Part B at age 65, you'll be slapped with a 10% penalty for each year you delayed enrollment.

Your Part B insurance will provide you with some free services such as a flu shot, diabetes and cancer screenings, and 'Welcome to Medicare' physical exam. If you take advantage of these services you may avoid more costly and more dangerous conditions.

Most seniors sign up for the Original Medicare plan, a combination of Parts A (hospital insurance) and B (medical insurance). However, if Uncle Sam's doesn't provide you with sufficient coverage, you may be better served by a private insurance company offering a Medicare-approved insurance plan.

Part C, also known as Medicare Advantage Plan, includes coverage for parts A and B through private insurance companies. The plans are usually offered in the form of a Health Maintenance Organization (HMO) or a Preferred Provider Organization (PPO). Your premiums, co-payments, coinsurance and deductibles will vary based on your specific plan benefits. And, although offered by private companies, Medicare Advantage Plans are approved by Medicare.

Choosing a Part C plan may mean you already receive prescription drug benefits. If your prescription drug coverage is deemed "creditable" by Medicare, you won't have to pay an additional premium for the Medicare prescription drug plan, also known as Part D.

Part D, the Medicare Prescription Drug Plan, is the newest of all the Medicare programs. However, Medicare does not provide the insurance directly. Instead, each state has contracted with insurance providers to offer the drug coverage. If you are a senior, you must decide if you should sign up, and then which plan you should purchase.

Most states offer at least 40 different drug plans. Premiums average $28 per month, depending on the level of coverage and the types of drugs covered by the plan. If you are enrolling in the Original Medicare or don't already have "creditable coverage", you'll need enroll in Part D, or face a penalty. If you fail to enroll at age 65 but decide to enroll at a later date, you'll pay a 1% penalty for each month you delayed enrollment.

The costs of Part D vary, and if you don't think you will need the coverage you should find the lowest cost Part D to avoid the penalties. That way, if you need the coverage later, you won't be stuck with premiums inflated by penalties. You can always change providers at a later time, if you decide different coverage suits your situation better.

If your income and assets are low enough, you may be able to save money on your Medicare costs. This assistance is done through your State Medical Assistance and is often called Medicaid. Call even if you aren't sure if you qualify. The Virginia Medicaid office can be reached at 804-786-7933. Call 1-800-MEDICARE to get the telephone number for other states.

The initial enrollment period begins three months before your sixty-fifth birthday and ends three months after your birthday. Be sure you enroll to avoid unnecessary penalties.

You can get more information by visiting Medicare on the web at www.medicare.gov or by calling 1-800-MEDICARE.

from http://www.emarotta.com/article.php?ID=257

Fund Your HSA to Cover Retirement Healthcare Costs (2007-11-12)

Fund Your HSA to Cover Retirement Healthcare Costs

(2007-11-12) by David John Marotta

Health Savings Accounts (HSAs) can provide inexpensive medical coverage if you maintain a healthy lifestyle. With your healthy lifestyle you may not spend anywhere near your high deductible insurance and consequently save on your medical costs. Even if you do not need to, we recommend funding your account with the maximum allowed. If your HSA builds up it may help you cover any extra medical expenses during retirement.

An HSA is a tax free savings account. As long as funds are spent on qualified medical expenses, all contributions, capital gains, and withdrawals remain untaxed. And like any other bank account, HSAs come complete with debit cards and checks.

But to qualify for one of these tax-free savings accounts, you must have a high deductible health plan (HDHP). Now, you may be thinking your insurance plan has a high enough deductible already. However, to qualify as a high deductible health plan, your insurance deductibles must be a minimum of $1,100 for individuals and $2,200 for families in 2007.

The good news is, once you meet your out-of-pocket deductible, most HSA-eligible high-deductible plans cover 100 percent of most medical expenses like emergency room visits, hospitalization, lab tests and prescriptions. Still, these deductibles are nothing to joke about. Paying a couple grand out of pocket before your insurance chips in may seem like financial suicide.

HSA-eligible high-deductible premiums are only a fraction of the cost of a traditional medical insurance plan. As an HSA owner you'll likely do better than break even each year. With the savings on your insurance premiums, you should be able to accumulate a sizeable nest egg in your HSA.

Unlike your traditional health care plan, your HSA funds are not subject to a "use it or lose it" policy. Anything you don't spend one year carries over to the next year. After all, it's your money. While you're on a roll, why not check out the invest options offered by your HSA bank?

Some people put only enough into their HSA each year to fund their medical expenses. This is shortsighted. We would recommend making the maximum HSA contribution each year, after covering your other financial needs.

In 2007, you can contribute $2,850 for individuals or $5,650 for families. If you are 55 or older you can make an extra $800 catch up contribution. In 2008, you can contribute $2,900 for individuals or $5,800 for families. If you are 55 or older you can make an extra $900 catch up contribution.

Once you enroll in Medicare (typically at age 65) you can't make new contributions to your HSA. But any money left in your HSA will continue to accumulate tax free. It is a good idea to over fund your HAS while you are young so that during your retirement you will have some extra tax-sheltered dollars to use for medical expenses. After enrolling in Medicare, you can't contribute to an HSA.

Any HSA withdrawals that are not for qualified medical expenses are counted as taxable income and subject to a 10% tax penalty. The tax penalty does not apply, however, if you are 65 or older, or are permanently disabled. However, the withdrawals are still taxable at ordinary income rates.

In other words, any excess contributions you make to your HSA can be withdrawn after age 65 without penalty. Just like a traditional IRA, when the funds are used for non-qualifying medical expenses you will have to pay tax on the withdrawals, which is no different than other retirement savings option.

The law is currently silent on what happens to your HSA when you reach 70 1/2. We expect that the IRS will treat your HSA like an IRA and therefore require minimum distributions, but this has not been settled.

When you die, your surviving spouse inherits your HSA and it is treated as their HSA if they are named as the beneficiary. Otherwise, your HSA ceases to be an HSA and is included in the federal gross income of your estate or the named beneficiary.

There are three strategies that you can use to grow your HSA large enough to cover your retirement years. First, make the maximum allowable deposit to your HSA each year. Second, if your medical plan includes the option, invest your HSA in mutual funds instead of keeping your account entirely in an FDIC-insured savings account. And third, delay reimbursing yourself from your HSA account as long as possible to profit from its tax sheltered compounding interest.

You can reimburse yourself for qualified medical expenses at any time, but you also have the option of leaving the money in your HSA so that it continues to grow tax free. You can save all your receipts in a shoe box for decades and then decide to withdrawal your reimbursements at any future date when you need the money. This allows the growth on these funds to continue to compound tax-free.

Once you turn 65 and enroll in Medicare you can no longer fund your HSA. Medicare will pay for the majority of your health expenses during retirement. There are some expenses, however, that Medicare will not cover that your HSA can. In retirement, your HSA can cover proactive health screenings, unconventional treatments for terminal illnesses and nursing home expenses. Your HSA can even cover long term care expenses if you decide to self insure, or pay your long-term care insurance if you decide not to. None of these expenses will be paid by Medicare.

Another option during retirement is to enroll in a Medicate Medical Savings Account. This account is similar to an HSA, but funded in retirement by Medicare contributions. If you select a Medicare MSA during retirement, you can use the funds in your HSA until you build sufficient value in your Medicare MSA.

Maximizing your contributions to an HSA may secure your health care spending for life. Even if you end up not needing it, you can pay income tax and withdraw it without penalty after age 65 just like a traditional IRA.

from http://www.emarotta.com/article.php?ID=256

Roth Conversions Can Help Build Wealth (2007-11-05)

Roth Conversions Can Help Build Wealth

(2007-11-05) by David John Marotta and Beth Anderson Nedelisky

If you don't have retirement savings in Roth IRAs, it's time you considered the benefit of these tax-savings accounts. The long-term tax savings opportunities are driving more Americans to rollover various retirement funds into Roth accounts. These so called "Roth conversions" can be performed on traditional IRAs. And, beginning in 2008, it will be easier to roll money from an employer plan into a Roth IRA.

But first, you may be wondering what's so great about Roth IRAs. Roth IRA contributions are always made with after-tax dollars. That's right; you won't get a tax deduction for contributing. However, the principle grows tax-free and the account holder may make tax-free withdrawals at 59 1/2. Furthermore, there are no required minimum distributions for a Roth, which makes them ideal for funding the latter years of retirement.

Conversely, a traditional IRA allows before-tax contributions to grow tax-deferred, but not tax-free. So, although you can usually deduct your contribution to a traditional IRA, you pay ordinary income tax on the withdrawals. Furthermore, the IRS will require you to take minimum distributions, whether you need the money or not.

However, Roth IRAs may not provide tax savings for everyone. Remember, contributions to Roths are made with after-tax dollars whereas traditional IRAs are made with pre-tax dollars.

Roth IRAs provide tax savings for individuals who expect to be in a higher tax bracket later in life. The tax benefits of a Roth are created by the tax disparity between your tax bracket when you put your money in versus your tax bracket in retirement. The lower your tax rate, and the longer you have until retirement, the more likely a Roth conversion will play in your favor.

Imagine John, age 60, owns two traditional IRA accounts. Each is funded with $5,000. Let's assume he keeps the $5,000 in one IRA. But with the other, he uses some of the funds to pay the taxes due and then converts it to a Roth. Assuming John remains in the same tax bracket and the accounts deliver the same return on investment, each account will generate the same spending money in retirement, after taxes are paid on the traditional IRA. If John drops into a lower tax bracket after his retirement, the traditional IRA would have been the better bet. But if John's taxes rise, the Roth IRA proves to be the better option.

Guessing your future tax rates is nearly impossible. Traditionally, it was thought your tax rate in retirement would be less than when you were working, but this is increasingly not the case. Tax rates are not adjusted for inflation, so many retired couples continue to creep into higher tax brackets. Also, tax rates are at a historic low and likely to rise if the political winds change.

If you expect to see your tax bracket increase significantly - from say, 15% to 25% - you will likely benefit from a Roth conversion. This is true for younger workers and also for new retirees. In the early retirement years, many couples dip into a lower tax bracket just after retirement but before Social Security checks start arriving.

Before you rush off to begin your Roth conversions, be sure you have enough money to cover the tax bill. During a conversion, you'll withdraw funds from your traditional IRA, report the funds as income, and roll them over to a Roth IRA account. The tax implications from the conversion will vary based on whether you took a deduction on the principal. If you deducted your IRA contributions, you'll have to pay taxes on both the principal and the earnings. If you didn't, you'll just pay taxes on the earnings. I say 'just,' but either way, this could be a big bill.

The good news is you can withdraw funds from your traditional IRA and convert them to a Roth without incurring the 10% early withdrawal penalty.

You'll also have to pass an income test. Until 2010, income limits do apply. Only joint and single filers with a modified adjusted gross income of $100,000 or less can qualify. After 2010, the income restrictions on converting funds from a traditional IRA to a Roth IRA will disappear completely.

Traditional IRAs, SEP IRAs and SARSEP IRAs are subject to the same conversion rules. Until 2010, you'll have to pass the income test to qualify.

SIMPLE IRAs can also be converted to Roth IRAs, if you participated in the plan for more than two years. SIMPLE IRA account holders are not subject to this rule if they are over 59 1/2. The income test of $100,000 or less (no requirement after beginning in 2010) still applies.

Keep in mind there are more ways than one way to get funds into a Roth IRA. Although conversions from a traditional IRA to a Roth are common, funds in employer sponsored plans – like 401k, 403b and 457 plans - can also be rolled over to a Roth.

In 2007, rollovers from an employer plan cannot go straight to a Roth IRA. Instead, you'll first have to rollover funds into a traditional IRA. Once in the IRA you can immediately do a Roth conversion. But thanks to the Pension Protection Act of 2006, it will soon be easier to convert your retirement savings to a Roth IRA. Beginning in 2008, funds from your employer sponsored plan can be directly rolled over into a Roth IRA.

However, don't confuse Roth conversions with the other Roth plans sponsored by your employer. Currently, you cannot convert a traditional 401k or 403b to its employer-sponsored Roth counterpart such –a Roth 401k, Roth 403b.

Remember, no matter when you do your conversion, it must be done before Dec. 31st of the tax year. Later, if you find you weren't eligible for the Roth conversion, you can undo the damage with a Roth recharacterization before your file your taxes.

For more information about tax planning, you are invited to attend the November NAPFA Consumer Education Foundation presentation. John G. Bowen, CPA, CFP®, AIF®, of Bowen Financial Services, LLC, will be speaking on the topic of year-end tax planning.

The seminar will be held on Saturday, November 10th from 12:00pm to 1:30pm at the Northside Library in the Albemarle Square shopping center. For more information call (434) 244-0000, or send an email to Charlottesville at NAPFAfoundation.org. To learn more about the NAPFA Foundation visit http://www.napfafoundation.org/NAPFAfoundation_Charlottesville.htm.

All presentations are free and open to the public. You are encouraged to attend and to bring your financial questions.

from http://www.emarotta.com/article.php?ID=255