Fidelity Investments has some tough news for soon-to-be retirees.
A recent study showed that healthcare expenses for a healthy 65-year old couple over the course of their retirement can get to $280,000 or even higher.
That’s a scary number. It’s not surprising that healthcare costs are one of the top financial concerns for both pre-retirees and retirees.
What if I told you that there might be a tool to help you avoid your personal healthcare savings crisis?
No, it isn’t a magic wand. But there is an account that’s custom-made to help you save money to cover medical expenses – and save money on taxes in the process.
Yes, I am talking about the Health Savings Account (or the HSA for short). When used strategically over time, this can become your secret weapon.
Do you have an HSA?
If you have a high-deductible health plan with a deductible of at least $1,350 if you’re single (or $2,700 for families), then you are eligible to open an HSA. Many employers offer it as a benefit. If your company doesn’t, you can open one yourself.
Do you use an HSA?
I hope so! Between restrictive use rules and relatively low contribution maximums, Health Savings Accounts are under-appreciated and underused. Believe it or not, only one out of four HSA-eligible employees actually use it!
HSAs are also easy to confuse with their close cousin FSAs (or the Flexible Spending Accounts). An FSA can’t be used to accumulate savings, and people worry about losing the account balance if they happen to not need it during any given year. HSAs don’t work the same way, but if you don’t understand the difference you can’t take advantage of them.
How much can you contribute?
This year, the HSA contribution limit is $3,500 for individuals and $7,000 for families. If you’re 55 or older, you may contribute an additional $1,000 per year. And, if your employer offers an HSA match, your account balance can grow even faster. If you are enrolled in Medicare Part A or Part B, you can’t contribute to an HSA.
Why should you consider using an HSA?
There are three reasons.
- One, any contributions you make are tax-free. HSAs are like 401(k) plans in that any money you put in will lower your taxable income.
- Two, your account will grow tax-free. Unlike a “use it or lose it” healthcare Flexible Spending Account, the balance in your HSA will roll over from each year to the next.
- Three, any withdrawals you take for qualified medical expenses are tax-free. That includes deductibles, dental and vision care, prescriptions, co-pays, and more. If you use this money for a non-qualified reason, the withdrawal will be taxed as income and you will have to pay a 20% penalty.
What happens when you retire?
Once you enroll in Medicare, you can’t contribute to your HSA any more. But you can use the money you’ve saved to pay for any out-of-pocket healthcare expenses (like copays, deductibles, hearing aids, nursing home care, in-home care, and more).
There is one other hidden benefit, and the reason why some financial planners refer to HSAs as “a secret IRA”. After you turn 65, the 20% penalty on non-qualified withdrawals goes away. So, you will only pay income taxes on any non-medical withdrawals.
If you worry about the cost of healthcare in retirement, consider an HSA. If you’re not sure whether an HSA is right for you, our team at Independence Wealth can help you figure it out.