Healthcare expenses in retirement: How to use your IRA wisely

Retirement, that long-awaited moment after a lifetime of work, shouldn't be overshadowed by the anxiety of medical expenses.

Yet for many Americans, health-related costs are becoming one of the largest budget items.

According to Fidelity, a 65-year-old couple can expect to spend an average of $330,000 on health care during retirement, a figure that doesn't even include long-term care.

In this context, proper management of your Individual Retirement Account (IRA) can make all the difference between serenity and financial stress.

The rising cost of healthcare

Even with Medicare, retirees face a significant share of uncovered costs: dental care, eyeglasses, hearing aids, home care, expensive drugs, even extended stays in nursing homes.

Added to this are potential expenses before the age of 65 for those who choose to retire early, a period during which private health insurance can cost more than $2,000 a month for a couple.

That's why it's essential to integrate health expenses into your retirement planning now, and understand how to mobilize your resources, including your IRA accounts.

What your IRA can do for your health

Individual Retirement Accounts (IRAs) aren't just tools for long-term compounding; under certain conditions, they can be used to cover unexpected or planned medical expenses. Here are a few strategies to be aware of.

Penalty-free early withdrawal for medical expenses

Before the age of 59 and a half, any withdrawal from a Traditional IRA generally incurs a 10% penalty, in addition to income tax.

But there are exceptions, notably for unreimbursed medical expenses exceeding 7.5% of your Adjusted Gross Income (AGI). 

So if you have significant health expenses, you can dip into your IRA without penalty, as long as you comply with the limits and reporting deadlines.

Payment of health insurance premiums in the event of unemployment

If you are unemployed and have received benefits for 12 consecutive weeks, you can also make IRA withdrawals to pay your health insurance premiums, without penalty.

This can be a vital way of preserving your medical coverage without depleting other savings.

Total and permanent disability

Another exception, if you are determined to be permanently unable to work, you can access your IRA funds without penalty, regardless of your age. 

Social Security disability benefits can serve as official proof.

Plan for long-term care

One of the most costly pitfalls of retirement is long-term care. Medicare does not cover non-medical long-term care, such as extended stays in nursing homes or home health aides.

On average, a year's private room care costs $127,000, according to Genworth Financial. Unless you've purchased dedicated insurance, which is often expensive, your IRA can become a solution of last resort.

Planning scheduled withdrawals or a partial conversion to a Roth IRA to anticipate these future expenses can help you avoid unpleasant tax surprises when you need it most.

The Roth advantage: Control your taxes and Medicare premiums

If you convert a portion of your Traditional IRA to a Roth IRA before age 63, you can reduce your future taxable income, and therefore your income-adjusted Medicare (Part B and D) premiums (Income-Related Monthly Adjustment Amount - IRMAA).

In fact, Roth IRA withdrawals are not considered taxable income, allowing for better tax management of your long-term healthcare expenses.

A well-planned conversion can therefore reduce your taxes and your healthcare expenses, while maintaining total flexibility over your withdrawals.

The IRA to HSA transfer: A one-off cost to be calculated carefully

Another little-known but effective strategy is the one-time transfer from an IRA to a Health Savings Account (HSA).

This operation, known as qualified HSA funding distribution, allows you to transfer up to $8,550 (in 2025 for family coverage) tax-free and penalty-free, provided you qualify for a high-deductible health plan.

This allows you to set up a fund dedicated to medical expenses, withdrawals from which are tax-free when used for medical purposes.

Note, however, that this is a once-in-a-lifetime maneuver, subject to strict conditions. The assistance of a financial advisor is essential.

Healthcare, retirement and strategy all in one

Health costs in retirement need not be a foregone conclusion. Intelligent planning of your Individual Retirement Accounts (IRAs) enables you to cope with the unexpected, optimize your tax situation and preserve the quality of your retirement.

By combining tools like Roth IRAs, HSAs, planned conversions, and a keen understanding of Medicare and Social Security rules, you can turn a potential obstacle into a security lever.