401(h) Plans
"A 401(h) account provides a unique triple tax advantage - tax-deductible contributions, tax-free growth, and tax-free distributions for qualified medical expenses"
Understanding 401(h) Plans
A 401(h) Plan is a specialized medical expense account under Code Section 401(h), designed to cover the costs of sickness, accident, hospitalization, and medical expenses for retired employees, their spouses, and dependents. This plan is a powerful tool for managing one of the largest expenses faced by retirees—healthcare costs.
How Does a 401(h) Plan Benefit Retirees?
The primary advantage of a 401(h) Plan is its ability to offer tax-free payouts for medical expenses. Employers can make tax-deductible contributions to a fund that grows without incurring taxes, allowing retirees to withdraw money tax-free when needed for eligible medical expenses.
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Why Consider a 401(h) Plan?
Despite its significant benefits, the 401(h) Plan is largely underutilized in retirement planning. Adding a 401(h) option to a pension plan can enhance the maximum tax-deductible contribution by up to 33.33%, making it an excellent choice for profitable small business owners.
Practical Application for Business Owners
Consider the case of Mr. Smith. As a small business owner earning $400,000 annually, he currently contributes $80,000 yearly to a defined benefit plan. If Mr. Smith reallocates $10,000 to a 401(h) Plan, he can significantly decrease his taxable withdrawals needed for medical expenses in retirement.
Is a 401(h) Plan Right for You?
Contact us today to explore how this overlooked opportunity can integrate into your comprehensive retirement strategy and safeguard your future.
Exploring the Financial Benefits
Tax-Free Growth and Withdrawals
Funds contributed to a 401(h) Plan grow tax-free and can be withdrawn tax-free, a distinct advantage compared to other taxable retirement plans. For Mr. Smith, this means removing $10,000 annually tax-free from his 401(h) Plan, unlike the $15,384 required from a taxable pension plan to cover the same medical expenses.
By using a 401(h) Plan, Mr. Smith can sustain his medical expense withdrawals until age 90, compared to running out of funds at age 78 if using a taxable pension fund. This net benefit equates to an additional after-tax sum of $127,007 over time.
Implementing a 401(h) Strategy
For clients seeking to reduce taxable income while securing tax-free retirement withdrawals, a 401(h) Plan is an invaluable component of estate planning. It offers a strategic advantage in preserving wealth, particularly for high-income earners and business owners.
As financial advisors, we are committed to guiding you through the benefits and setup of a 401(h) Plan. Contact us today to explore how this overlooked opportunity can integrate into your comprehensive retirement strategy and safeguard your future.
