When we think about saving for retirement the only accounts that come to mind usually are 401(k), IRAs and Roth IRAs. We very rarely think about the usefulness of a health savings account (HSA). One of the biggest expenses retirees have to face is the cost of health care. Many people believe that Medicare will cover theses costs but in reality it is only a small piece. Retirees still need to pay for prescriptions, vision, dental, some services (lab tests, surgeries, and doctor visits) and supplies (wheeler chairs, walkers, etc.). Why should this matter to someone who is under the age of 45? Health savings account, although forgotten, can help you be better prepared for retirement.
What are they?
Health savings accounts are available to individuals and families who are enrolled in a high-deductible health plan (HDHP). A HDHP is one where the minimum deductible in a health insurance plan is $2,500 for a family ($1,500 for individual). They were created to help alleviate the cost of health care but have also created a very unique savings vehicle.
- Contributions to this account are tax deductible (similar to IRAs)
- Maximum contributions of $6,450 for a family per year ($3,300 for individual)
- Money can be rolled over from year to year
- Contributions can be invested into an investment account
- Withdrawals out to pay for qualified health expenses are tax-free
Why they might be important.
I want to focus on #’s 4 & 5 because this is where it can be an important piece to your savings. Typically, when you sign up with a HDHP you will have the option to establish an account with a bank. The insurance paperwork may make it seem like you have to sign up with that specific bank but that is not the case. You can open up an account where ever they offer health savings accounts. An example of this would be to open an account up at Vanguard and invest your contributions. I would first caution that you would want to make sure you have your total out of pocket expenses available in cash in case something were to happen. But after that bucket is filled is when you can start investing your money.
Next, withdrawals out of the HSAs are tax-free if spent on qualified health expenditures. One of these qualified expenditures is long term care insurance which according to the Department of Health & Human Services 70% of people turning age 65 can expect to use some form of long-term care. This happens to be the only savings vehicle that the government gives you an upfront deduction and a free pass on taxes on the back end. Most retirees will have extra health care expenditures so why not start saving for them. Growth in an investment account can grow exponentially over long periods of time and this which can help alleviate the burden of costs down the road.