Money Advice

Your secret weapon in fighting retirement healthcare costs

Posted by The Simply Money Advisors Team on Jul 11, 2018 1:58:56 PM

What’s your biggest worry about retirement? If it’s healthcare costs, you’re not alone. According to a new survey, more than one-third of respondents ranked medical bills as their most concerning retirement expense.

But three letters could be the secret weapon to help you tackle that fear head-on: HSA.

What’s an HSA?

HSA stands for “Health Savings Account.” Created by Congress in 2003, it’s an account used to save for both short-term and long-term medical costs through triple tax breaks: contributions you make to the account are pre-tax; the money grows tax-free; and distributions come out tax-free (as long as you’re withdrawing the money for “qualified” expenses).

The money is also yours forever. It rolls over from year to year, meaning it’s not “use or lose it.” And even if you change employers, the account stays with you.

There’s one big “but:” you must be covered by a high-deductible health plan to use an HSA. Some plans aren’t always clear, so be sure to ask your insurer or employer if your plan is HSA-eligible.

What’s a qualified expense?

You can use HSA money for out-of-pocket medical expenses as determined by the IRS. This can include deductibles, co-pays, and vision and dental care. Search this list to see what medical expenses do and don’t qualify.

If you withdraw money for any non-qualified expense and you’re younger than 65, you’ll be taxed at your ordinary income rate and you must also pay a 20% penalty.

Where can I open one?

If you have insurance through your employer, you can open one through the designated HSA administrator. And while it’s not required to use that provider, it usually helps keep things more streamlined and you’ll reap the benefits of any perks, such as an employer contribution.

If you want to look elsewhere, most banks and brokerage firms offer HSAs. The website HSASearch is a helpful starting point to compare accounts.

What happens in retirement?

Once you enter retirement, the HSA rules change a bit. If you’re enrolled in Medicare, you can no longer contribute to your HSA. However, you are allowed to continue withdrawing from the account tax-free to pay for qualified medical expenses.

But get this: Once you hit age 65, you can use your HSA money for any expense and not be penalized. For example, if the money goes towards a non-eligible expense, you’ll only be taxed at your ordinary income rate, essentially turning your HSA into a de facto 401(k).

So should I use the money now or save it?

While the original intention of an HSA was to help pay for medical expenses that pop up throughout the year, at Simply Money Advisors, we believe it’s generally more advantageous to contribute to a HSA and not touch the money until retirement.

Yes, you’ll have to pay for short-term medical expenses out-of-pocket, but in exchange for that sacrifice, you’ll be building a tax-free lump of money to help pay for future healthcare costs in retirement.

The Simply Money Point

If you’re eligible to save in an HSA, it’s a great tool to have at your disposal as you’re planning for retirement.

Just remember that for all the perks an HSA brings to the table, there are consequences to having a high-deductible plan. Because while your monthly premium will be lower, by definition your deductible will be higher. You need to be sure you have money on hand to pay for the short-term expenses. But the trade-off can be worth it.

And to learn more about planning for retirement, visit our “Retirement Resources” library to gain access to free downloadable guides, video tutorials, and live events!

Take me to Retirement Resources

Topics: Retirement

Disclaimer

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Simply Money Advisors), or any non-investment related content, made reference to directly or indirectly will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, this content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained here serves as the receipt of, or as a substitute for, personalized investment advice from Simply Money Advisors. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Simply Money Advisors is neither a law firm, a certified public accounting firm, nor a tax advisory firm and no portion of the blog content should be construed as legal, accounting, or tax advice. Please consult your own attorney, accountant, and tax advisor for legal, accounting, and tax advice. A copy of the Simply Money Advisors’ current written disclosure statement discussing our advisory services and fees is available for review upon request. Advisory services offered through Simply Money Advisors, a SEC registered investment adviser. Insurance services are offered through Simply Money Insurance Agency, a separate entity from Simply Money Advisors. Simply Money™ and the spiral symbol are trademarks of Simply Money IP Holdings, LLC.

Simply Money Advisors

Your trusted financial planning partner helping to protect your money and make it grow.

Subscribe to Blog Updates

Recent Posts