When we speak to clients about retirement there are two common themes, will I have enough saved and what impact would medical expenses play on my results. In an effort to increase savings for retirement and mitigate some portion of future medical expenses we are encouraging clients to look into the Health Savings Accounts (HSA).
The HSA provides four benefits:
1. Contributions to the account are tax-deductible
2. It allows you to save money completely tax-free
3. It allows you to pay for medical expenses without paying tax on distributions
4. It allows you to rollover the remaining balance at year-end
For clients in high income tax states this can be a way to force additional money into tax free savings, and this account can also be used to fund retirement medical costs. Let’s assume you do not need the money for your current medical expenses and are able to put the maximum into the account annually for twenty years. At a 5% growth rate you will have approximately $224,000 in the account. When you retire and have increased medical expenses, you can tap into this account to cover these costs tax free. If for some reason you have more money in the HSA than you need to cover your medical expenses, you can begin to distribute the money without penalty after age 65. You will pay tax on this distribution but there is no penalty. In that regard, it works like a traditional IRA.
There is only one downside to HSA accounts, not everyone can establish them. You must have a qualifying high-deductible health insurance plan in place. This means your deductible must be at least $1,300 for individuals or $2,600 for a family plan. More and more employers are using these high deductible health plans as a way to save on premiums, so more people should be eligible for an HSA.
In a time when everyone is looking to save on taxes and there is a fear of medical expenses ruining your retirement plans, the HSA may provide a partial solution for both.