Article
As you are entering your 6os, expect a volume of mail about your upcoming Medicare coverage. If you’re a business owner, taking a few thoughtful steps in your early 6os can make the transition to Medicare and required retirement distributions more tax advantageous for you. Make this transition easier by knowing when to change health insurance and how to avoid paying unnecessary income taxes by delaying required distributions.
The transition from your current insurance to Medicare
Should you consider delaying Medicare benefits? Medicare allows you to delay enrollment ii you have insurance that is eligible to be your primary coverage through your business. If you have a high deductible plan and contribute to a health savings account (HSA), you may want to continue the triple tax benefit of the HSA. If you have a higher income, you may want to delay paying the income-based Medicare Part B premiums until your income decreases.
The following four rules can help:
- RULE 1 If you have 20 or fewer employees, your primary insurance must be Medicare Part A and B, with your business insurance plan serving as secondary insurance.
- RULE 2 If you have more than 20 employees and will claim Social Security after age 65, you may find a health insurance provider that will allow you to delay Medicare coverage and to continue contributing to a health savings account.
- RULE 3 If you are on Medicare, you may not contribute to a health savings account.
- RULE 4 When you begin Social Security benefits, you are required to enroll for Medicare Part A. which will disqualify you from a health savings account contribution.
Start shopping for plans when you turn 63 to find an insurance plan that does not require Medicare to be your primary insurance. Due to the regulations around health insurance, consult with a health insurance specialist or your financial advisor.
Avoiding unnecessary income taxes by delaying required distributions
If you own more than 5% of your business in your 60s, you are likely thinking about when and how you plan to step away from the business. If you plan to work past age 70 1/2, you may not need the money from your retirement plan until after your salary ends.
The IRS requires you to take minimum distributions from retirement accounts, such as a 401(k), 403(b), or IRA starting when you are age 70 1/2. While a Roth IRA has no required minimum distributions, a Roth 401(k) or Roth account within your 401(k) does require minimum distributions. The IRS offers an exception to the required distribution rules ii you are still working and you and your family members own 5% or less of the business. By selling the majority of your business interests, you could delay the required distributions from the business’ retirement plan and avoid unwanted taxable income from required distribution.
All business owners know that a sale negotiation may take some time. Consider starting the sale process in your mid to late 6os so the sale is complete by age 69 1/2. Review this article for questions to consider as you determine a possible buyer.
Becoming aware of all financial changes that can occur when you enter your 6os can help you to make wise choices for your retirement security. Consult with a tax or financial advisor, and use the following to checklist to help:
Quick reference checklist:
- When you turn 63, ask your insurance agent to look for insurance coverage that does not require Medicare to be your primary insurance. If you want to continue contributing to an HSA, ask for the new insurance plan to be a qualified high deductible plan. Verily that the new coverage begins before you turn 65.
- You will likely automatically be enrolled in Medicare Part A and receive a Medicare card in the mail. Near your 65th birthday, un-enroll from Medicare Part A ii you want to continue health savings account contributions.
- Within 6 months of retirement, start the process to enroll in Medicare Parts A. B, and D for coverage to begin once you are no longer covered by your business’s insurance plan.
- Stop your HSA contributions when you enroll in Medicare. If you enroll in the middle of the year, verify your HSA contribution amount is the maximum amount prorated for the portion of the year that you were eligible. Example, If you enroll in Medicare with an effective date of June I, then you can make 5/12 of the maximum allowed contribution for that year.
- By your early to mid 60s, start to consider whether you will sell your business. Review this article for questions to consider as you determine a possible buyer.
- By age 68, decide whether you will complete the sale of the majority of your business interests (so you and your family own exactly 5% or less after the sale) to avoid taking required distributions from your business’s retirement plan.
- By age 69 1/2, complete the sale of your business interests if you want to delay 401(k) required distributions.
