VOL. 132 | NO. 248 | Friday, December 15, 2017
Plan for Retirement Health Care Costs With an HSA
By Daniel Allen
Planning for health care costs during retirement is a key component of your overall plan. According to Fidelity Benefits Consulting, a 65-year-old couple retiring this year will need an average of $275,000 (in today’s dollars) to cover medical expenses throughout retirement – and that does not include potential long-term care costs.
Premiums for Medicare Part B, Medicare Part D and a Medigap Supplemental Policy, among others, begin to add up over a 25-year retirement period. (Luckily, Medicare Part A is free.)
Families must be aware of these potential costs. The bottom line is that health care costs will affect you and your children financially, physically and emotionally. Having a plan to address these concerns is essential to easing the potential burden of this risk on you and your family.
WHAT IS AN HSA?
Health savings accounts were created in 2003 under the Medicare Modernization Act. They allow owners to pay for current medical expenses, as well as save for future health care expenses.
Individuals and families are eligible for HSAs if they are covered by a “high-deductible” health plan – defined as a $1,300 deductible for individuals or a $2,600 deductible for a family. In today’s health care landscape, most people are covered by high-deductible health plans and therefore eligible to participate in an HSA.
HOW MUCH CAN I CONTRIBUTE?
HSAs allow individuals to contribute up to $3,400 per year (with $1,000 catch-up if you’re 55 or older). Families can contribute up to $6,750 per year (with a $1,000 catch-up if you’re 55 or older).
WHY SHOULD I CONSIDER AN HSA?
A variety of features make them attractive. Dollars contributed to a health savings account are tax-deductible in the year of the contribution, interest earned grows tax-free, and owners may make tax-free withdrawals to cover “qualified medical expenses.” In other words, participants get a triple tax benefit!
“Qualified medical expenses” generally cover most health care costs, including but not limited to: most services provided by licensed health providers, Medicare premiums, long-term care premiums, diagnostic testing and devices, prescriptions, substance-abuse treatment, dental work and more.
Other beneficial aspects of a health savings account include:
The owners can carry over any funds not used from year to year.
HSA owners can invest the dollars contributed to the account. This is a powerful way to help insulate you and your family from the burdens of rising health care costs, especially during retirement. For example, if a family contributed the current maximum annual contribution ($6,750) over a 20-year period and earned 6 percent on their contributions, they would have almost $250,000 for future health care expenses.
HSAs do not have a required minimum distribution, meaning owners can pass them down to listed beneficiaries to use for medical expenses tax-free. As health care costs continue to rise, this can be a game changer for individuals and families as they plan for their retirement years.
WHAT’S THE CATCH?
Like anything, there are some potential drawbacks to health savings accounts. For example, if you withdraw money from your HSA before the age of 65 and for nonmedical expenses, you’ll pay a 20 percent penalty, as well as income tax on any capital gains. After age 65, you can withdraw money for nonmedical expenses and avoid the penalty, but you’ll still have to pay income taxes on any capital gains.
While we have not covered all aspects of a health savings account here, we believe it is clear that these tax-advantaged savings vehicles can be critically important to your financial future.
Daniel Allen is a wealth adviser at Red Door Wealth Management in Memphis.