Money Talk: A retirement catch-22 and health savings accounts

Dear Liz: My wife and I are withdrawing an unusually large amount from our IRAs in order to make a 20% down payment on the construction of a new retirement home. This withdrawal will, unfortunately, bring our modified adjusted gross income above the limits that will cause increases in our Medicare premiums in 2026. Is there any way to avoid this increase?

Answer: You have the right to appeal an increase in your premiums, but successful appeals usually require someone to have experienced a drop in income due to retirement, a spouse’s death or divorce, for example. A one-time increase in your income — because of a large IRA withdrawal or capital gains from the sale of a home, for example — usually won’t qualify for relief.

As you know, Medicare’s income-related monthly adjusted amount (IRMAA) adds surcharges to Part B and Part D premiums when incomes exceed certain amounts. In 2024, IRMAA starts when modified adjusted gross income exceeds $103,000 for individuals or $206,000 for married couples filing jointly. There’s a two-year delay between when you report your income and when IRMAA increases your premiums.

The good news is that the increase isn’t permanent. If your income goes back to normal next year, so will your 2027 premiums.

An ex-husband is delaying his Social Security benefits. Must she wait, too?

Dear Liz: I read your column about divorced spousal benefits for Social Security. I was divorced as of Jan. 1. My ex-husband will be 65 next year and wants to delay benefits until he’s 67. Must I wait to get spousal benefits until then because of his decision? I also will be 65 next year. We were married 36 years.

Answer: If you were still married, you would have to wait until your husband applied for Social Security before you would be eligible for spousal benefits. Since you’re divorced, you only have to wait until he qualifies to file for retirement benefits to file. (He qualified when he turned 62.)

That doesn’t mean you should rush to file, however. Starting benefits before your own full retirement age means accepting a permanently reduced check. Your benefit also would be subject to the earnings test, which withholds $1 of your benefit for every $2 you earn over a certain limit, which in 2024 is $22,320.

Waiting until full retirement age means both the reduction and the earnings test would disappear. If you were born in 1960, your full retirement age is 67.

Spreading the wealth in health savings accounts

Dear Liz: I have a family health savings account with a qualifying high-deductible health insurance plan. The HSA will become my individual account when my youngest turns 26 and no longer qualifies for our insurance plan. My husband can’t contribute to an HSA because he’s on Medicare. I have read that if I die before him, he can use my HSA for his own medical expenses. Can I use my HSA to pay his medical expenses now, even though I can’t contribute to it on his behalf?

Answer: Yes. A spouse can use HSA funds for the qualifying medical expenses of a spouse as well as other dependents, according to Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

If you want to pass the funds to your husband should you die first, you should make him the designated beneficiary of the account. Otherwise, the account could become taxable at your death, as mentioned in last week’s column.

More about health savings accounts and the ‘deathbed drawdown’

Dear Liz: I just read your column on HSA accounts. I was with you right up until “deathbed drawdown.” I sincerely hope that I am not thinking about my HSA when I am nearing death. I’d just rather pay the tax.

Answer: That’s certainly your prerogative, but financial planners note that good record keeping can allow those with large HSA balances to avoid an otherwise unnecessary tax bill.

HSAs offer a rare triple tax break: contributions are tax-deductible, the money grows tax deferred and withdrawals are tax free when used for qualifying medical expenses. Furthermore, HSAs can be rolled over from year to year and invested for growth, which has led some people to accumulate substantial sums as a supplement to their retirement funds.

Fortunately, you don’t have to take a withdrawal in the same year you incur an unreimbursed medical expense. As long as the expense was incurred after you established the HSA and before your death, it can justify a tax-free withdrawal years or even decades later. Those who have kept good records of their unreimbursed medical expenses can justify last-minute withdrawals if necessary.

Liz Weston, Certified Financial Planner®, is a personal finance columnist. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.