For most people, the rising cost of healthcare poses a major concern for lifestyle in retirement. It also makes the decision of when to retire that much more challenging, knowing this is an unavoidable yet sizeable expense. After the Affordable Care Act went into effect in 2010, the focus was more on access to services, not about coverage or controlling costs. With healthcare costs rising at a rate of about 5% per year with no end in sight, we are helping our clients navigate strategies to best plan for this expense now, and especially, during retirement years. And as average life expectancy continues to increase, the money you will need to support this expense becomes even more important. The question then becomes:
- What are my options for saving for healthcare related costs?
- Is there an optimal vehicle to park these savings?
While any form of savings can help curb these expenses, health savings accounts offer many advantages, particularly for retirees, and are quickly becoming part of their strategic retirement plan.
What is an HSA?
An HSA is a type of savings account that can be used by those participating in high deductible health insurance plans. A high deductible health plan (HDHP) is defined by the IRS as having a deductible of $1,350 for an individual or $2,700 for a family. As of 2019, the annual contribution limits for funding an HSA include $3,500 for an individual and $7,000 for a family plan, plus a $1,000 catch-up provision for those age 55 or older. These savings vehicles provide a triple tax advantage to clients as you receive a tax deduction for your contribution, the funds grow tax free, and distributions from the account are tax free if used for qualifying medical expenses.
You can invest the funds in the account, allowing your HSA to grow like your other portfolio assets. In addition, HSAs are portable, meaning the account stays with you if you change employers or stop working. This is an important distinction from health reimbursement or flexible spending arrangements (i.e. FSAs or HRAs) and is a common misconception, because other reimbursement accounts must be used, generally by year-end, or you forfeit the funds, and they are not portable. Whether or not an HSA is offered to customers is specific to the health insurance provider. However, if you have a high deductible health plan and no HSA is offered directly with that company, you can look to banks or other financial institutions that offer these types of accounts.
What can you use it for?
Health savings accounts allow you to pay for things that insurance doesn’t cover. For example, you can use your HSA to pay for expenses covered by your HDHP until the deductible is met, or you can pay for expenses not covered by your plan, such as vision or dental expenses. Prior to age 65, you must use any HSA monies to pay for qualifying medical expenses, or you are subject to taxation on the distributed amount plus a 20% penalty. After age 65, if you pay for non-qualified expenses with your HSA you are not subject to the penalty but you must report the amount distributed as taxable income.
You can use the account to pay for your spouse or dependent, as long as they do not have HSA plans of their own. HSAs can be used by all age groups and as popularity and awareness of them continue to grow, many people are embracing them, especially Millennials who are very focused on saving. Most retirees have qualified assets as a big part of their retirement savings, such as IRAs or 401(k)s. When you need to cover expenses, however, this money is withdrawn and subject to taxation as ordinary income.
The fact that you can withdraw from an HSA tax- free makes this an attractive bucket to draw from as another way to fund your retirement needs. Generally, you may not use HSA funds to pay for insurance premiums as they are not considered qualified medical expenses unless they meet certain qualifications. Insurance premiums would be covered if they are used for long- term care insurance, health care continuation coverage such as COBRA, health care coverage while receiving unemployment benefits, or to pay for Medicare and other health care coverage if age 65 or older, with the exclusion of premiums paid towards a Medicare supplemental policy, such as Medigap.
For a complete list of approved qualified medical expenses please see this IRS publication: https://www.irs.gov/pub/irs-pdf/p502.pdf
Is it right for me?
While HSAs can serve as an important component to your retirement planning, every client’s situation is unique and it is important to weigh the pros and cons before switching to a high deductible health plan. For example, if a family has a need to visit the doctor frequently, it may make more sense not to enroll in a high deductible health plan because having a small co-pay each visit is more beneficial than meeting a large deductible just to be able to partake in an HSA. Conversely, if you are not in this situation you may find that annual contributions to an HSA end up costing less than premiums paid for a traditional coverage plan.
In short, the objective would be not to end up paying more for medical expenses than you would have if you chose a lower-deductible plan. In addition, if clients can afford to pay for current medical expenses out of current cash flow, then it is an argument for having a high deductible health plan. It is also important to evaluate the fees assessed in the account to ensure they are reasonable, making the investment worthwhile. Bottom line, if you find yourself enrolled in a HDHP and are able to make the contributions to an HSA, directing a portion of your savings into this vehicle may be prudent. As always, you can reach out to a StrategicPoint Investment Advisor today if you’d like to learn more.
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Kristina’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm or our parent company, Focus Financial Partners. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.