Health Savings Accounts Can Improve Your Retirement Plan

Key Points

  • Any financial plan covers living expenses in retirement, but a better plan leaves room for unexpected healthcare needs.
  • Determining if you are eligible for a Health Savings Account can seem confusing but the right wealth advisor can walk you through it.
  • The tax benefits of a Health Savings Account are nearly unparalleled if funded appropriately.

 Long -Term Healthcare

Most of us are familiar with typical retirement plan options. 401(k) plans and IRAs – traditional and Roth – are fixed in our minds as we plan for the future, and rightfully so. They’re great ways to invest. What’s not always considered on the typical retirement roadmap is earmarking funds for healthcare. This study (1) estimates that the average 65-year-old couple retiring in 2020 will need approximately $295,000 after tax to cover health care expenses during their retirement years.

Paying for your healthcare – especially long-term care – during retirement is just too important to overlook. Any financial plan covers living expenses in retirement, but a better plan leaves room for unexpected healthcare needs. The inability to pay medical bills in retirement, whether through an HSA or other savings, could drastically change your retirement plan: your options for care may be limited to lower-quality facilities, or you could leave a significant debt to your estate (assets designated for family may instead pay your healthcare costs).

Health Savings Account Eligibility

Determining if you are eligible for a Health Savings Account can seem confusing. You can contact your employers’ HR department, go straight to your insurance provider, or as a Cook Wealth client, you can allow us to handle it. We’ll look at everything (your overall goals, tax dependent status, your health insurance and deductible, and more) then recommend the optimal way to save now for healthcare expenses during retirement.

Eligibility to contribute to an HSA plan means:

  • You are not a dependent on someone else’s tax return.
  • You have other health coverage, or are enrolled in Medicare.
  • You are covered by a high deductible health plan (HDHP*), defined as having a minimum annual deductible of $1,400 for self-only coverage or $2,800 for family coverage.

Health Savings Account Advantages

Health Savings Accounts are the best way to accumulate assets for healthcare if you are eligible. Why? They’re powerful. Think of an HSA as your superpower against avoidable healthcare taxes – super strength to save you more, flexibility to choose withdrawal dates and expand eligible expenses, and even transfer ownership if you don’t spend it all.

HSA Triple Tax Advantage

That’s 3 – yes, 3! – phases of tax savings:

  1. All contributions to an HSA plan are tax deductible
  2. The assets grow tax deferred
  3. All future withdrawals used for qualified medical expenses are tax free (2).

If you fund your HSA with paycheck deductions, you reduce your taxable income and avoid FICA taxes altogether. Just like an IRA or 401(k), the assets inside of an HSA can be invested for long-term growth. Of course, that means volatility and should be accounted for when considering any immediate needs, but tax deferred compounding (allowing your assets to grow without the burden of capital gains taxes) can provide a tremendous savings boost over time.

HSA Flexibility Power

HSA funds can be spent tax free in a variety of ways including covering Medicare Part B and Part D premiums, bridging the gap to Medicare for those who retire before age 65 or pay for long-term care expenses.

Speaking of long-term care, costs are rising. With a national average cost of $253 per day ($7,698 per month) for a private room in a nursing home (3), an extended stay in a long-term care facility can quickly accrue enormous costs if not properly planned for. You can use HSA funds to pay both long-term care expenses and premiums on a qualified long-term care insurance policy. (The allowable amount for LTC premiums varies with age, ranging from $420 for those under age 40 to $5,270 for those over age 71 (4).

After age 65, the owner of an HSA can spend the funds on nonqualified expenses but the withdrawal will be subject to ordinary income tax, as with an IRA distribution. Before age 65, withdrawals for nonqualified expenses are also subject to a hefty 20% penalty on top of income tax. Also, unlike an IRA, which requires the owner to begin taking distributions at age 72, you do not have to withdraw funds from your HSA.

HSA Transferal Power

With no withdrawal requirement, it’s important to consider: what if you don’t spend as much on healthcare as anticipated?
If your spouse is the HSA beneficiary, he or she may spend the HSA funds on eligible expenses and/or continue to contribute and enjoy the same tax-free perks. For a non-spouse beneficiary, the health savings account ceases and the fair market value is taxable to the recipient.

Like all aspects of a financial plan, funding an HSA is a decision unique to you. While the penalty for nonqualified early withdrawals is steep, the tax benefits of an HSA are nearly unparalleled if funded appropriately and reserved for health care expenses, a fundamental cost we consider in your retirement plan.

Could you benefit from opening a Health Savings Account, or by reassessing your contributions? Cook Wealth Management Group is highly proficient in optimizing every aspect of your financial plan. With a broader vision of what wealth management should be, we deliver a personalized plan designed to reward you now and throughout life.

Ready to channel your tax-fighting HSA superpower? Contact us to speak with an advisor.

*2021 HDHP contribution limits: individual – $3,600 and family – $7,200.