Get triple the tax benefits with an HSA, and find an affordable health plan while you’re at it
Medical bills can be expensive at any age, but often balloon in retirement
By Alessandra Malito| Courtesy Market Watch
Healthcare can be expensive in retirement but also in the decades before — a Health Savings Account could minimize the blow when the medical bills arrive.
HSAs have triple the tax benefits: contributions are pretax, the funds can be invested to grow tax-free and distributions for qualified health expenses aren’t taxable. Unlike a Flexible Spending Account, which is funded with pretax dollars but must be used by a specific deadline (usually the end of the year, or a grace period if employers allow), HSA contributions can remain in the account to be used for future medical bills — a huge bonus to retirees.
Doctor visits, unexpected trips to the hospital and medications can be expensive at any age, but retirees can expect to spend hundreds of thousands of dollars on healthcare in their old age. The HSA shines as a tool for paying future medical bills and is “a critical way for people to build a medical nest egg over time,” said Alison Moore, vice president of marketing at HealthSavings, an HSA provider. “Not only can you build, invest and throw in money tax-free over time, but you can reimburse yourself over time for all of the out-of-pocket expenses,” she said.
HSAs have a maximum yearly contribution limit of $3,600 for an individual in 2021 or $7,200 for an individual with family coverage, with a $1,000 catch-up allowance for people 55 or older. After age 65, the money can be taken out for non-health care expenses without a penalty but the money will be taxed, as it would if it were distributed from a traditional individual retirement account or 401(k) plan. Contributions may also be placed in an HSA until the following year’s tax deadline, for those who weren’t able to max it out before the end of the year.
Employers may also contribute to an HSA on behalf of their employees.
Health Savings Accounts have become increasingly popular. There were more than 29 million HSAs with a total of at least $73.5 billion in assets as of June 2020 — a 19% growth in assets and 12% jump in total accounts from the year before, according to an HSA report from investment firm Devenir. Fidelity Investments announced it had surpassed managing $10 million in HSA assets as of March.
“It’s a really great account to pay for costs in retirement,” said Shelly-Ann Eweka, a wealth management director at TIAA.