Healthcare Savings Accounts in Retirement

Healthcare expenses can reach upwards of a quarter of a million dollars after retirement.

Most people know about 401ks and IRAs for retirement, but how up to date are you on Health Savings accounts and how they can help you manage expenses? Think beyond the retirement income you could have coming in when you leave the workforce, and plan for the expenses you could have going out, too.

What is a Healthcare Savings Account (HSA)?

An HSA is exactly what the name what are says – a savings account for your healthcare expenses, which are guaranteed to rise after retirement. More than 4 million workers decide to retire every year. When those people, who are over the age of 65, decide to leave the workforce, their healthcare expenses can reach upwards of a quarter of a million dollars after retirement.

There is a common misconception that because you have Medicare that it will take care of most of the costs, but that is a belief on which you cannot rely. In fact, you will discover quickly that you still have many out-of-pocket expenses that you are expected to cover. This is, of course, after you already pay the more than $4,000 per year for just basic Medicare insurance. That is why many choose the HSA.

An HSA is an account with two distinct features: high-deductible insurance coverage, and the benefits of a tax-favored savings account.

How does an HSA work?

As you deposit money into an HAS account, it earns interest, just as a traditional savings account does, but you can use the money to pay healthcare expenses, or you can keep unused earnings.  To qualify for an HAS account, it MUST be a savings account combined with a high-deductible insurance plan that qualifies for HSA coverage.

HAS account holders make deposits that are tax deductible, and when the coverage is needed, it provides tax-free medical care. The money you save in the HSA can be used to help you meet the high deductible demands. After meeting the deductible, the insurance coverage kicks in and starts paying health care expenses. Again, anything that is left over is yours.

Benefits of the HSA in retirement

As stated before, paying for medical expenses during retirement can and will cause a great strain on families and individuals, and that doesn’t include what you can expect to spend on Medicare and available supplemental plans – or Medigap. The HSA can help make up the additional healthcare and financial gaps. Benefits of HSA accounts in retirement include:

  • Similar to an IRA retirement account, all contributions made to the account are tax-deductible up to 100% as long as they are within the IRS’s establish legal limits.
  • You don’t have to forfeit any earnings at the end of the year if you don’t use the money in the HSA account. This is different than FSA accounts because the money is yours to keep.
  • The interest earned on the contributions is tax-deferred as long as you don’t withdraw it.
  • Accountholders who use the HSA to pay for qualified medical expenses can do so without encountering taxes.
  • HSA accounts allows accountholders to save money by purchasing high-deductible health insurance plans, which allows insureds to put the extra money in the savings account instead so they have it if they need it, regardless of when the healthcare expense occurs.
  • For many plans, the minimum annual deductible is as little as $1500 for individual policies, and the amount nearly doubles for family plans.


What are qualified expenses for HSA accounts?

To benefit from tax-free payments for HSA qualified expenses, you have to first know what is covered and what is not to avoid a penalty.

Qualified Expenses

  • Vision-related or vision-loss expenses: optometry, exam, glasses, surgery, correction surgery, contact lenses, braille books and magazines, seeing-eye dog
  • Alternative treatments: acupuncture, chiropractor, religious practitioner
  • Dental expenses: dentures, corrective treatment, braces
  • Disability services, devices, improvements: artificial limbs, home care, home improvements, wheelchair, and assistive devices

Non-qualified expenses

Thin of non-qualified expenses as ones you could do without, that are considered luxury or not essential for your healthcare needs. Examples of ineligible expenses are maternity clothes and diaper services, illegal operations, vitamin supplements, veterinary fees, FSA accounts, teeth whitening, and dance or fitness lessons.

Should you spend HSA dollars first, or last? All things being equal, it makes sense to delay taking out of your HSA accounts because you’ll almost always have medical expenses which can come out of the account tax-free.

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investing for retirement ebook ipad - McClain Lovejoy
investing for retirement ebook ipad - McClain Lovejoy
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