Virtually everyone saving for retirement has heard of the various accounts used to accumulate wealth like 401(k)s or IRAs, but one type of account may be under-utilized: the Health Savings Account, otherwise known as an HSA.
Health savings (not spending) accounts could be an important savings tool as health care costs rise and humans live longer on average. A HealthView Services report found that a healthy 65-year-old couple that retires in 2020 will have to pay around $387,644 — or $572,960 when adjusted for inflation by the end of retirement — in total health care costs over their lifetime. Included in this measurement, per the study:
- Medicare Parts B and D premiums.
- Supplemental insurance (Medigap).
- Dental insurance.
- Out-of-pocket costs for doctors visits, hospitalization, tests, prescription drugs, hearing aids, hearing services, vision and dental procedures.
What may be troubling, though, is that many financial advisers don’t utilize HSAs nearly enough, even with the tax advantages these accounts can provide. A Devenir Research report from June showed that by the middle of 2019 there were 26 million HSAs with over $61 billion in assets, and that number is set to grow to 30 million accounts with $88 billion invested by the end of this year.
But the savings opportunity seems to be ignored. A HealthSavings study showed 60% of financial advisers aren’t offering HSAs to their clients for numerous reasons, per HealthSavings:
- 36% of advisers say they do not fully understand how HSAs work.
- 40% claim their clients don’t fully understand HSAs either.
- Almost 50% say HSAs are perceived only as spending accounts.
- Of the advisers that do offer the accounts, less than half of their eligible clients actually use them.
Using an HSA to Save for Retirement
An HSA can be a powerful tool to supplement your retirement savings, especially as health care costs rise. Remember these are funds that are sheltered from taxation for the most part, and that alone can lead to some major savings. Some of the benefits of having this type of account include:
- Contributing to an HSA is either tax-free or tax-deductible.
- Withdrawals from an HSA to pay for eligible medical expenses are tax-free.
- Investment earnings from the accounts are tax-free in most states.
- After age 65, you can withdraw funds to pay for non-medical expenses, but you will have to pay taxes on that expense.
There are limits to how much you can contribute to an HSA, though. An individual can contribute $3,550 a year while a family account can accrue $7,100.
One thing to keep in mind is that once you enroll in Medicare, you can no longer contribute to an HSA. But the money already in your HSA can still be withdrawn to pay for medical or other expenses.
And that’s an important and powerful thing to remember about HSAs in comparison to other health savings plans like flex spending accounts (FSAs). The “S” in HSA means “save” not “spend.” If you can hold off on spending money within your account, you can keep stockpiling money for health expenses, which in turn can become a nice nest egg for health care in your golden years.
And like other retirement accounts, funds within an HSA can be reinvested to accelerate growth depending on how much risk you want to take on. Of course, life happens, and sometimes you may have to dip into the account to pay for an unexpected expense.
Medical expenses and unavoidable, and using an HSA can help you better prepare for those expenses in retirement.
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