Money Advice

Your secret weapon in fighting retirement healthcare costs

Posted by The Simply Money Advisors Team on Jul 11, 2018 9:01:00 AM

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 Planning


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