With health care costs continuously increasing, paying for medical expenses has become a concern for all Americans. According to Fidelity Investments, estimates show that an average 65-year old couple will spend approximately $260,000 on health care during retirement. These high costs emphasize the importance for individuals to prepare and to take full advantage of long-term investment opportunities. Health Savings Accounts (HSAs) can provide an alternative investment option and can be a powerful retirement tool.
A Health Savings Account (HSA) is a tax-exempt trust or custodial account created to help cover qualified medical expenses. They are designed to help individuals manage their current medical expenses and establish a long-term savings plan to use for medical expenses during retirement. If used properly, one can take full advantage of this investment tool and enhance their financial situation. In order to qualify, individuals must meet the following requirements:
- Covered under a high deductible health plan (HDHP) on the first day of the month.
- Have no other health coverage except what is permitted under “Other health coverage.”
- Are not enrolled in Medicare.
- Cannot be claimed as a dependent on someone else's tax return during the previous year or during the year in which they invest in an HSA.
A growing number of employers offer an HSA-eligible health plan to help cover qualified medical expenses. It provides companies an alternative to traditional health insurance and the ability to better manage health care costs by lowering premiums and reducing payroll taxes. More importantly, employees benefit from an investment standpoint. HSAs offer several advantages to investors. An important characteristic of HSAs is that the “use it or lose it” rule does not apply, unlike FSAs and other health flexible spending accounts. It permits unused funds in the account to grow year after year tax-free to pay future qualified medical expenses. In addition, HSA accounts are:
- "Triple tax-advantaged."
- Account contributions are pre-tax or tax-deductible. (Annual limits to the amount of contributions for 2017 are $3,400 for individuals and $6,750 for families, while the catch- up amount for ages 55 and over is an additional $1,000).
- All earnings and interest are tax-free.
- Any withdrawals for qualified medical expenses are tax-free. Plus, once an individual reaches age 65, all nonmedical withdrawals are taxed at the current tax rate, just like a traditional IRA
- Fully portable. As with an IRA, an HSA account is owned outright and can be rolled over to another HSA custodian, subject to some restrictions. https://www.irs.gov/publications/p969
- Designed for the future. Contributions and earnings, combined with the power of compounding help the account grow over time. And unlike IRAs, HSAs do not have required minimum distribution (RMD) rules.
- Not limited by your income. No matter how much is earned, if the account owner meets the other HSA qualifications, they can open an account (annual contribution limits apply).
Finally, HSAs offer the flexibility to use the money once you reach age 65. Although they primarily function to pay for qualified medical expenses, HSAs enable individuals to use the account for other expenses during retirement. Below are four important ways that the money can be used:
- Help bridge to Medicare;
- Cover Medicare premiums;
- Long-term care insurance;
- Pay everyday expenses.