It is estimated that Americans will need $275,000 for healthcare related expenses in retirement. One tax-advantaged account that many people don’t know about or don’t realize the full extent of benefits is the Health Savings Account (HSA). A lot of people use flexible spending accounts at work which is money that is put into an account pre-tax and can be used for certain out-of-pocket healthcare related expenses. Employees can contribute up to $2,650 per year to their flex spending account. However, the trick with a flex spending account is that if you don’t use all the money in the account during that year it will not roll over to the next year. It is a “use it or lose it” account.
This is where the HSA comes in. To qualify to contribute to an HSA you need to have a high-deductible health plan. In 2018 the IRS defines high-deductible as at least $1,350 per individual or $2,700 per family and with an out-of-pocket maximum as at most $6,650 per individual and $13,300 per family. The maximum contribution that an individual can make is $3,450 and a for a family is $6,900. If you are over 55 you are eligible to contribute an additional $1,000 to your HSA. Any money you contribute to a HSA will be carried over from year-to-year if you do not use it.
Some things to know about HSA accounts:
- Money contributed is tax deductible
- As long as the money is used for qualified healthcare expenses, your withdrawals, including investment gains, are free from federal tax
- Interest, dividends and capital gains are not taxed
- Unlike a traditional IRA or 401K, there is no required minimum distribution after age 70 ½. The money can stay in the account as long as you like
- If you withdraw money before age 65 to be used for expenses outside of medical care, there is a 20% penalty and the withdrawal will be treated as taxable income
- After age 65, you can withdraw money form the account without paying a penalty for any use, however, the money will be considered taxable income if not used for qualified medical expenses
The link below will take you to an IRS website that lists qualified medical expenses:
The health savings account should be a part of your retirement planning as it offers some benefits and flexibility that other plans do not. If you contribute the $6,900 per year for 20 years, with average investment returns of 7%, your HSA will have a balance of about $330,000! And, just as importantly, as you take that money out for medical expenses, there will no impact to your taxable income at the time of withdraw. You can open a HSA through bank, broker, credit union or an insurance company. There are also companies that specialize in health spending accounts. One popular company is Health Equity (www.healthequity.com)
At Chatham Wealth Management, we build custom portfolios of individual stocks and bonds for clients based on a comprehensive plan that we create. If you are interested in learning more about retirement planning and for a free “retirement check-up” please contact us. The link below will take you to our contact page.