Retirement Planning: Why You Should Use Your Health Savings Account to Save for Retirement
It’s no surprise that paying for health care expenses — Americans’ greatest financial concern — can quickly deplete retirement savings.
Today, health care costs for retirees average more than $9,000 annually, according to CNN Money. Based on the average life expectancy in the U.S. (78.8 years), that means you could pay more than $124,000 in today’s dollars if you retire at age 65.
These costs are only expected to rise over time, financial planners say. So having a backup plan to pay for these expenses is becoming even more important.
That’s where a health savings account (HSA) comes into play.
“It’s hard to know what the cost of health care is going to be down the road, but looking in our recent to immediate past, health care costs have gone up more than just normal inflation for everything else,” says certified financial planner Ryan Thomas, of Indianapolis-based Column Capital Advisors, LLC. “HSAs can help retirees cover some of these costs during retirement.”
Health Savings Account: What Is It?
HSAs, first offered in 2004, give consumers incentives to manage their own health care costs, according to a report by the American Bankers Association and America’s Health Insurance Plans (AHIP).
As its name suggests, an HSA is a savings account used specifically for the purposes of covering medical expenses both before and during retirement.
In order to fund an HSA, you must be covered by a high-deductible health plan that meets certain requirements for deductibles and out-of-pocket expense limits.
Then, you can enjoy some of the benefits HSAs provide.
What Are the Benefits?
HSAs offer a “triple tax benefit,” Thomas says.
- You can deduct the amount you’re contributing to the HSA on your tax return.
Each year the IRS establishes limits for how much an individual or family can contribute to the health savings account; the amount changes each year based on inflation.
This year, HSA holders can contribute up to $3,300 for an individual and $6,550 for a family. Those age 55 and older can contribute an extra $1,000, which means $4,300 for an individual and $7,550 for a family, according to the HSA Center.
“These contributions are 100% tax deductible from gross income,” the Center reports.
- Funds within your HSA can grow tax-free.
When you open up your HSA with a qualified institution, the account will typically earn a nominal amount of interest, like a regular savings account, Thomas says.
However, some HSA providers will give you the option to open a sub-investment account, in which you can take your funds and invest them in stocks, bonds or mutual funds.
If your HSA is invested and provides dividends and interest, that growth will not be taxable, he says.
- Contributions and withdrawals are not federally taxed, as long as you use the account for qualified medical expenses, as described by the IRS.
Be sure to research eligible expenses before taking any funds out of the account, because distributions not used for qualified expenses are included in gross income and, for those under age 65, subject to an additional 10% tax.
How to Use Your HSA as a Retirement Vehicle
Many people make contributions to their HSA to access its tax benefits and then tap into their savings as soon as they incur medical expenses.
However, Thomas suggests pre-retirees allow their HSA account to grow in order to fund health care costs down the road in retirement.
“What they should do is pay for the medical costs out of pocket and leave the funds sitting in the HSA so they can grow tax-free as long as they’re used for qualified medical needs,” he says.
But this can create its own challenge, since HSA account holders are enrolled in high-deductible health plans, meaning they’ll pay more upfront for health care needs.
Having another set of funds on the side for the purpose of paying deductibles can help offset this financial burden.
“My strategy is to use your other funds to pay for the medical expense and use the HSA to fund retirement health care needs,” Thomas says.
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