Broker Check

Making the Most of Your Health Savings Account

| June 17, 2019
Share |

Those that say “the only things certain in life are death and taxes” probably haven’t retired yet, because “healthcare costs in retirement” would definitely be a worthy addition to that list! According to the latest Bureau of Labor statistics (2016 data), households run by someone Age 65 or older spend an average of $3,800 a month on healthcare costs (two-thirds of this for insurance) and that does not include long-term care costs.   While it’s unlikely you can avoid all healthcare expenses in retirement, there are resources that can help ease that burden a bit, both now and in retirement.  Enter the Health Savings Account (HSA).

Think of a Health Savings Account as a mini retirement fund set up specifically for healthcare expenses.  Contributions into them are tax deductible, just like contributions to traditional IRAs and 401(k)s are.  The big difference is that, when you make a withdrawal from an HSA account, as long as the money is spent on qualified medical expenses, it’s not income-taxable.

An HSA account is similar to a flexible spending account (FSA) offered by many employers, but there are a few key differences:  1)  an HSA account can actually be considered an investment, because you don’t have to ever spend it, and 2)  there isn’t a “use it or lose it” requirement.  With an FSA, you typically have to spend the money in your account in the same year you contributed to it, or risk losing it.  With an HSA, you can let your money grow for years.

However, you cannot open an HSA account unless you are enrolled in a high-deductible health insurance plan.  This means that the plan will need to have a deductible of at least $1,350 for individuals or $2,700 for families with a maximum out-of-pocket spending limit of $6,750 for individuals or $13,500 for families.   There are also limits on how much you can contribute to an HSA account in any given year.  In 2019, that’s $3,500 for individuals and $7,000 for families.  Accountholders over Age 55 can contribute an additional $1,000 per year.

While HSAs don’t have to be used strictly for medical expenses, there is a pretty stiff penalty for making withdrawals that are used for non-medical expenses:  20%, plus your withdrawal is subject to income taxes, so it’s best to just plan to use the account for healthcare expenses.  Note:  insurance premiums generally are not considered qualified medical expenses unless the premiums are for:

  • Long-term care insurance (traditional, not hybrid)
  • Health care coverage under COBRA
  • Health care coverage while receiving unemployment benefits, and
  • Medicare and Medigap coverage if you are Age 65 or older.

While it may seem easier to put more money in your IRA or 401(k) for retirement, having a separate fund set up to help with your healthcare costs in retirement is a smart idea.  If you are hit with a big healthcare bill in retirement, you can access your HSA anytime to cover these costs and leave your IRA or 401(k) working to cover your other, more predictable living expenses.  Remember, making withdrawals from your HSA to cover healthcare expenses is tax-free, potentially saving you thousands of dollars in retirement. 

It’s best to open an HSA account as early as possible, when retirement is still a few decades away. Then, try to save as much as you can into the account and not touch that money until retirement.  (Remember, according to Fidelity Benefits Consulting, the average couple retired at Age 65 will spend $285,000 in retirement).

Keep in mind that your eligibility to add to an HSA account may change over the years.  If you switch insurance plans to something that isn’t HSA-eligible, you won’t be able to contribute to your HSA account, but you can keep what you’ve already accumulated. 

Remember, healthcare expenses can be among the biggest costs you'll face in retirement, and taxes can also take a big chunk of withdrawals from your retirement savings accounts. Having HSA savings as part of your overall retirement spending strategy will help you meet one of those “certain” needs and give you a tax break at the same time. 

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Please discuss your specific situation with the appropriate professional.

Share |