Health Savings Accounts – Ep. 05

Health Savings Accounts are reshaping the way we think about saving for retirement. They are said to be triple tax advantaged. And when you consider the average couple will spend $280,000 on health care in retirement, the HSA should be in our plans.

Video: Health Savings Accounts

Where does the $280,000 go?

You may think the $280,000 figure would include things like Medicare supplements or even the costs for a nursing home stay.  Not according to Fidelity.  This figure covers the bare minimum as shown in the graph below.
Health Savings Accounts

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Do you have a health savings account? If so, this could be one of the best tools to help you save for retirement. They are triple tax advantaged. The government created Health Savings Accounts in 2003. They allow people covered by a high deductible health plan, to set money aside to pay for their regular health expenses. They are one of the more advantageous tools to use for retirement savings.

Health Care Costs in Retirement

The average couple will spend over $280,000 on health care in retirement. Those costs include:
  • medicare part b and part d premiums
  • Costs for prescriptions and,
  • the outlays you have for deductibles and co-pays.
This can be one of the largest expenses of retirement. Paying these expenses out of your 401(k) or IRA, create taxable income. If you pay those costs out of an individual or joint account, you may incur capital gains. But if you use a Health Savings Account….

The Triple Tax Benefits of Health Savings Accounts

Consider this.
  • A health savings account allows you to accumulate money on a tax deferred basis,
  • It’s funded by tax deductible contributions,
  • And distributions to pay for those qualified health care expenses are not taxed.
The list of qualified health expenses includes:
  • co-pays and deductibles.
  • Prescriptions,
  • and even your medicare premiums
  • long term care insurance.
  • eye doctor and eye glasses, and
  • dental expeneses.
And if you wanting to retire before you reach age 65, you can also use your HSA to pay for your insurance premiums. And if you do, all those distributions are TAX FREE. To be eligible to use a Health Savings Account, you have to be covered by a high deductible insurance plan. If you aren’t sure if your health plan is a high deductible plan, check with your employer or your agent. You can contribute up to $7,000 if your plan covers more than one person and $3,500 if it only covers you. You get a tax deduction for the contributions you make, even if you don’t itemize. If your employer makes the contributions, the amount is not included in your income. So how can you best use this type of plan?

Prioritize Your HSA

Shift your saving strategy. For years, people would try to maximize their retirement plans or IRA contributions. Consider shifting some of those savings to your HSA. You want to maximize the employer matching contributions in your 401(k). But it may be worth it to shift some of your savings to maximize your HSA contributions.

Conserve Your Health Savings Account

Pay for your current small medical expenses from other accounts. You can use the health savings account for those qualified medical expenses. But don’t use it to pay for that $5 generic drug, the $25 office co-pay, or even the $150 dental visit. By spending less from that account, it will help your balance grow faster.

Pursue Long Term Growth

Invest it. I have an HSA account. My provider allows the participants to open an investment account to pursue long term growth. Be careful though. Your provider may have service fees if your primary HSA checking account falls below a certain level. Make sure you know their rules. The triple tax benefits of :
  • deductible contributions,
  • tax deferred growth,
  • and tax free distributions for qualified medical expenses
are game changers. And, they are reshaping how we think about saving for retirement.