The cost of health care in retirement continues to rise. The average couple will need $280,000 for medical expenses in retirement, according to a 2018 estimate by Fidelity Investments. While Medicare eligibility begins at age…
The cost of health care in retirement continues to rise. The average couple will need $280,000 for medical expenses in retirement, according to a 2018 estimate by Fidelity Investments. While Medicare eligibility begins at age 65, retirees should expect to pay for premiums, co-pays, some drug prescriptions and other expenses not covered by insurance. It’s important to set aside funds early for health care needs in retirement.
A health savings account allows you to you save for medical expenses both now and in retirement. To qualify for an HSA, you’ll need to be enrolled in a high-deductible health insurance plan. The IRS says an HDHP has an annual deductible of at least $1,350 for an individual and a maximum deductible and other out-of-pocket expenses of $6,650 for 2018. For a family, the minimum annual deductible is $2,700, and the maximum annual deductible and other out-of-pocket expenses is $13,300.
Every year you can contribute to your HSA, up to a certain amount. In 2018, the limit is $3,450 for an individual and $6,900 for a family. For individuals who are age 55 or older, an additional $1,000 can be contributed each year. The funds can be used toward eligible medical expenses, even into retirement.
If you’re thinking about contributing to an HSA or have already started an account, it’s important to know exactly how these vehicles work and how they can be used later in life. Here’s a look at some common misconceptions surrounding HSAs as well as the realities behind them.
If you don’t spend the funds, you’ll lose them. Even though there is an annual limit to the amount you can contribute each year, there isn’t a set amount you’re required to withdraw annually from an HSA. “You don’t need to take distributions from the account,” says Cynthia Turoski, a certified financial planner and managing member of Bonadio Wealth Advisors in Albany, New York. If you’re in a solid financial position, you might opt to pay for medical expenses with cash on hand. “You can let the balance ride into retirement to cover your health care costs in retirement,” Turoski says.
The HSA balance is just like cash. When you place funds into an HSA, the amount can be withdrawn for medical costs. What you don’t use can be invested. “Many plans allow an investment option,” Turoski says. “If you’re going to pay for medical expenses out of cash flow, investing the money smartly could enable the account to grow over time.” If you’re not sure what your plan offers, ask your employer or an advisor to help you understand the details. You might be able to invest unused funds in mutual funds or stocks.
Taxes will be a problem. HSAs offer numerous tax advantages. “Money contributed to a HSA is tax-deductible, and your investments grow tax-free,” says Brad Zucker, a financial consultant and president of Safe Money Advisors in Las Vegas. “If you use the money for a qualified medical expense, you can also withdraw your money tax-free.” However, the money will be taxed if you withdraw it for a reason that is not a qualified medical expense. If you’re under age 65, you’ll also need to pay a penalty for funds taken out for non-qualified medical expenses. After age 65, funds that are used toward medical expenses will not be taxed. If you’re over age 65 and withdraw money from the account for non-medical costs, the amount will be taxed.
I can’t get an HSA if my employer doesn’t offer it. While many workers enroll in an HSA through the company they work for, it’s still possible to get one if your employer doesn’t offer one. “To be eligible to contribute to a HSA, you must be covered by a high-deductible health plan and you must not be enrolled in Medicare,” says Rob Grubka, president of Employee Benefits for Voya Financial in Minneapolis. So if you’re self-employed or don’t have access to an HSA through your employer, you might be able to open one through a bank or financial institution.
Switching jobs could mean losing an HSA. While your employer may initially offer an HSA, if you move to a different company, you won’t necessarily have to replace the HSA. “With a HSA, you are the owner,” Grubka says. “This means you can make contributions throughout your career as long as you have a high-deductible health plan, and the account stays with you even if you change employers.” You can also designate a beneficiary, such as a surviving spouse, to use the funds for health care costs.
I can participate in an HSA while collecting Social Security benefits. You won’t be able to put more money into the account once you have Medicare. “You can’t be covered by Medicare Part A while participating in a HSA,” Turoski says. “Collecting Social Security benefits automatically puts you under Medicare Part A.” If you contribute to an HSA until you retire and start receiving Medicare, you can then plan to use the accumulated fund to pay for costs such as premiums, deductibles and other health-related expenses.