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4 Ways to Help Clients Plan for Unexpected Medical Expenses

Medical expensesHealthcare costs are rising faster than inflation, so it is no wonder that a recent AICPA survey of CPA financial planners found that clients were most concerned about running out of money, partially due to unpredictable healthcare costs, as well as market fluctuations and lifestyle expenses. One unexpected costly illness could cause significant financial distress for many Americans. Here are four ways you can help your clients avoid this particular fate and better secure their future.

1: Medical expenses toward the end of life can create significant tax deductions. The moment you hear that a client or a client’s spouse is having a healthcare crisis, moving into a nursing home or incurring significant healthcare expenses, you should start thinking about the best approach to fully utilize healthcare deductions. For example, the client may benefit from taking money out of an annuity, doing a Roth conversion or simply taking more money out of an IRA than the Required Minimum Distribution calls for. Rather than reacting to the need for immediate cash, you can help your clients plan for “seemingly” unexpected expenses. I say “seemingly” because all of us can expect to incur end-of-life expenses; we just don’t know when they will occur, of course.

2: Building up a Health Savings Account (HSA) offers a tax-savvy approach to creating a reserve for future medical expenses. This is a good approach for three reasons: contributions to an HSA are tax-deductible, the deduction is not subject to the threshold for medical expense deductions on Form 1040, Schedule A and withdrawals for qualified expenses aren’t taxed. Think of the tax benefit of a traditional IRA and Roth IRA combined: an individual could contribute to an HSA if that person is in a high tax bracket (there are no income limitations), get an above-the-line deduction, invest the HSA balance for growth and then make tax-free withdrawals decades later to cover qualified medical expenses – or even to help pay for qualified long-term care insurance.

3: With or without an HSA, evaluate the cost, benefits and tax deductibility of long-term care insurance.  Evaluating long-term care insurance is increasingly important due to expanded longevity and growing costs. Yet, clients often erroneously believe that Medicare pays for it or that risks are low. In fact, according to www.longtermcare.gov, 70 percent of people turning 65 can expect to use some form of long-term care during their lives.             

4: Planning for the survivor. Spouses often fail to consider scenarios where one spouse survives the other for many years. Knowing what these scenarios entail is important to the continued financial independence of the surviving spouse.  For instance, what income would the survivor be left with – Social Security, a pension or something else? If there’s a pension, what percentage would the survivor receive? How would taxes change due to filing under the single status? How much additional help would the surviving spouse need for housekeeping, gardening, meals, shopping and other expenses?  

Spouses sometimes assume that if they have enough income for two, a surviving spouse should be OK because the expenses will decrease. Expenses may, in fact, decrease, but they may stay the same or increase as well. For example, the survivor may no longer be able to live on his or her own and need to move to assisted living housing. Changes in expenses should be considered, along with any income decrease and tax increase. Plan practically and educate your clients on the realities their specific situation involves if they are the survivor.

Additional Information

Jean-Luc Bourdon participated in a recent AICPA Webcast, “Practical Planning for Aging and Elder Issues.” Click here to access the webcast and visit the PFP Division’s Retirement Planning Center for more information on a variety of retirement topics. The resources are free to PFP/PFS members, and excerpts from many resources are provided to nonmembers, along with instructions on how to access more information.

Jean-Luc Bourdon, CPA/PFS, BrightPath Wealth Planning, LLC. Jean-Luc is very active in the profession and often speaks and writes about financial planning. He serves on the PFP Executive Committee, and has written articles for CPA Insider, AICPA Wealth Management Insider, The Tax Adviser and the Journal of Accountancy.

Medical expenses courtesy of Shutterstock. 


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