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By Bill Harris, RMA®
We all want to be smart about planning for the future, both for ourselves and our loved ones.
When we think of life’s significant events, we usually think about college, weddings, and buying a house. After that may come raising a family and, eventually, retirement.
There is one item you may have left off your list, however. Part of creating a safe and secure future is planning for future medical expenses. As you create your holistic financial wellness plan, you may want to consider an HSA.
What is an HSA?
A Health Savings Account (HS”) is a tax-deductible savings account designed to help people with high-deductible health insurance plans cover their out-of-pocket expenses.
HSA plans have been around for more than 15 years, and even though they offer some fantastic benefits and can help significantly with retirement savings they have been largely underutilized.
Unfortunately, HSAs are often marketed as a revolving line of credit for medical expenses. In my opinion, withdrawing funds from an HSA while you are in the accumulation phase takes away its biggest potential which is another tax favored saving vehicle earmarked for medical expenses in retirement.
According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple aged 65 in 2020 may need approximately $295,000 saved (after tax) to cover health care expenses in retirement. The HSA is perfectly positioned to handle this liability.
What are the Benefits of an HSA?
1. Qualifying Expenses
To qualify for an HSA, you must first have a high-deductible health plan. Once you have that and are enrolled, you will likely be surprised at the wide array of medical, dental, and mental services that qualify. In addition, your HSA will issue you a debit card that you can use to pay for those qualified services without having to go through a third party for a simple payment.
As of 2020, individuals can contribute $3,550 a year, and families can contribute $7,100. If you are 55 years are older, you can contribute an extra $1,000 annually. Contributions can be made to your account personally, but that’s not all. Employers, relatives, and anyone else who feels so inclined can contribute to your HSA up until that maximum contribution limit is reached. Plus, your HSA compounds and rolls over unused funds. If you don’t use the entire amount that year or any at all, it will continue to compound year after year until you need it. Also, HSAs allow for a wide range of investment options to grow your funds.
Just like an IRA, HSAs go wherever you go! It doesn’t matter if you change jobs or insurance plans; your HSA has the mobility to follow you anywhere.
One of the main reasons to invest in retirement accounts of all types is the tax benefits. An HSA is no different and features the following perks, which makes it an excellent addition to your retirement plan.
Since most individuals contribute to their plans via payroll deductions, the money contributed is not added to your gross income. Therefore, you don’t have to pay taxes on it.
Let’s say that you make contributions on your own with after-tax dollars. You can deduct it from your gross income on your tax return, thus, reducing your taxes during that year.
When you need to withdraw money from your account for qualified medical expenses, you don’t pay taxes on that either. Just remember that if you withdraw for non-qualified expenses of any kind, you will have to pay taxes and a penalty.
Don’t forget that your account makes money all by itself, and you don’t have to pay taxes on that either!
HSAs and Holistic Financial Wellness
HSAs are an excellent addition to creating a holistic financial wellness plan. HSAs provide an avenue to build a long-term health savings account that you can use well into retirement.
Get started today, as health care expenses for retirees continues to rise.
Bill Harris is a Retirement Management Advisor® (RMA®), a CERTIFIED FINANCIAL PLANNER™ practitioner (CFP®) and a Master Elite Ed Slott Advisor. He is president of WH Cornerstone Investments, a financial advisory firm located in Kingston, MA. Learn more at www.whcornerstone.com.