Health Savings Accounts (HSAs) are an oft-overlooked stratagem in retirement planning. Individuals with high-deductible health insurance plans can establish an HAS and make tax-deductible contributions to it. Congress created these plans to help individuals pay for medical expenses not covered by insurance. HSAs allow tax-free distributions to pay for unreimbursed medical expenses. Distributions taken that are not used to pay for unreimbursed medical expenses are taxable and subject to a 20% non-qualified distribution penalty. However, the 20% penalty no longer applies after reaching age 65.
IRS Regulations finalized in 2014 provide some relief for individuals who want to stretch out their retirement funds by generally allowing taxpayers to use up to the lesser of 25% or $125,000 of their retirement account to purchase a qualified longevity annuity contract (QLAC) within the account. The amount used to purchase the QLAC is subtracted from the account balance and would thus reduce the RMD from the retirement account each year until a specified time in the future when distributions must begin from the annuity.
When petitioners filed for Chapter 7 bankruptcy, they sought to exclude roughly $300,000 in an inherited individual retirement account (IRA) from the bankruptcy estate using the “retirement funds” exemption.