Healthcare costs may be one of the biggest expenses retirees face. Most retirees rely on Medicare, but Medicare coverage will only cover a fraction of the expenses retirees will need to cover. A great way to offset these healthcare costs in retirement is by setting up a Health Savings Account (HSA). A HSA is like a personal savings account that is earmarked for qualified healthcare expenses. It can be used for expenses now or in retirement.
There are many advantages to HSAs and a major one is the tax benefits. Like an employer sponsored 401k retirement plan, contributions to HSAs are made pre-tax and any growth on the funds contributed are tax free. The one big difference from a traditional 401k/IRA is that HSAs have an added layer of tax benefits. Any distributions from a traditional 401k/IRA are taxed as ordinary income, but with a HSA, distributions are tax-free if used for qualified healthcare expenses. Essentially, if you use your HSA for qualified healthcare expenses, you will receive the tax benefits of both a traditional and Roth 401k/IRA.
Another great advantage of an HAS is they are not merely savings accounts that sit in cash yielding little or no interest. These accounts can be invested for long term growth to combat the cost of inflation. Many forecasts project healthcare costs inflating at 4%-6%, so being able to grow your money so it can keep up with healthcare costs is extremely important.
Unfortunately, not everyone can open and save to a HSA. You must be enrolled in a high-deductible health plan through your employer or the healthcare marketplace, meaning your deductible must be at least $1,350 if you’re single or $2,700 for families. This type of healthcare plan can put a financial burden on individuals, as they will have to come up with greater out of pocket expenses before they hit their deductible and insurance coverage kicks in.
If you are eligible, you can contribute $3,500 if you are single and $7,000 if you are married. There is a $1,000 catch up contribution for those over 55 years old. Unlike a Flexible Savings Account (FSA) where you have to use the money or you lose it in a given year, funds inside a HSA can be carried over from year to year. You can continue to build up this bucket and use it for the rest of your life.
If you are looking for some extra places to save and aren’t sure where, a HSA is a great vehicle to consider.