Many seniors find that once retirement begins, health care becomes their biggest monthly expense, even surpassing housing. The good news is that people who put money into a health savings account, or HSA, can access tax-free funds to cover medical care during retirement. The bad news, however, is that more than half of older Americans don’t take advantage of the opportunity to fund an HSA.
Don’t miss out on a plethora of tax breaks
What makes HSAs so valuable is their tax-advantaged nature. Many people are used to the tax benefits offered by retirement plans like 401 (k) s. Well, HSAs allow for tax-free contributions, and any funds that are not used immediately can be invested so that they become a larger sum. Gains from investing in an HSA are not taxed and withdrawals are tax-exempt provided they are used to pay for qualifying health care expenses.
Now there is a problem with HSAs – to be eligible you must be enrolled in a high deductible health insurance plan, the definition of which changes from year to year. But in a recent survey, among adults aged 50 to 80 who were enrolled in a high-deductible insurance plan, only 45% had an HSA, according to the National Healthy Aging Survey. This means that more than half of older Americans are missing out on a key savings opportunity.
HSAs weren’t necessarily designed as a retirement savings tool. But they can easily double as one.
The reason? HSA funds never expire, so you can save in your 30s for health care expenses and withdraw that money in your 80s.
Additionally, there are penalties for HSA withdrawals for non-medical reasons, just as there are penalties for IRA or 401 (k) withdrawals before you reach age 59 1/2. But once you’re 65, you can withdraw funds from an HSA for any reason and avoid being penalized.
In this case, the worst that can happen is that you will be taxed on the money you withdraw. But since taxes apply to traditional IRA and 401 (k) withdrawals, you’re not in a worse position with your HSA.
You might really need the money
Fidelity Investments estimates that an average 65-year-old retired man leaving the workforce this year will spend $ 143,000 on health care expenses throughout his retirement. For the average 65-year-old retired woman, that total rises to $ 157,000, which explains why women generally outlive men.
If you want to have an easier time paying for the medical bills of the elderly, be sure to sign up for an HSA if you qualify. Not only that, but make sure you put more money into this account than you think you need for short-term health care expenses. This way you can enjoy tax-free earnings in your account.
Many people subscribe to an HSA through their employer. But if the company you work for doesn’t offer one, you can register independently. And the sooner you start funding an HSA, the more opportunity you’ll have to raise a good amount of money so that medical care is less of a financial strain once you retire.