Many of us are in the middle of fall open enrollment for employee benefits. This is the time of year when employees get to make their employee benefits choices for the upcoming year.
One of those choices will include your health insurance. Increasingly companies are offering high-deductible insurance plans that allow the use of a health savings account (HSA). With the cost of health care in retirement increasing, a health savings account can serve as an additional retirement savings vehicle on top of your IRA or 401(k) to help cover these costs.
The rising cost of healthcare in retirement
According to Fidelity an average couple both aged 65 will spend on average $245,000 on medical costs in retirement. This is up from $220,000 in 2014 and from $190,000 from their 2005 survey.
This is a significant amount even for retirees with a retirement nest egg in excess of $1million.
High deductible health insurance plans
Health insurance plans with an annual deductible of at least $1,300 for a single person and $2,600 for a family qualify for use with HSAs. These types of plan are becoming more common with employers and are available privately as well. Premiums are generally less expensive than plans with lower deductibles.
How the HSA works
HSA accounts can only be used in conjunction with a high-deductible health insurance plan. The HSA will be a separate account into which the employee or private policy holder can contribute money during the year. The money goes into the account on a pre-tax basis much like a traditional 401(k) or IRA. Additionally this is a great opportunity for those who earn too much to make pre-tax contributions to a traditional IRA, or who have made the maximum contributions to their 401(k) to reduce their taxable income a bit.
The contribution limits for 2015 are $3,350 for individuals and $6,650 for families. Those who will be 55 or older at any point during the year are eligible to contribute an extra $1,000. Some employers may also make contributions to employee’s accounts.
Money can be withdrawn tax-free from the HSA account to pay for qualified medical expenses. Money used to pay for non-qualified medical costs will be included in your gross income and included in your taxable income. Withdrawals for non-qualified expenses may also be subject to a penalty.
Money can also be left in the account from year to year unlike with a Flexible Spending Account (FSA) in which all money must be used by the end of the year in conjunction with qualified medical expenses. Any dollars not used are lost to you.
The money in the HSA is portable when you leave an employer. Many banks and investment custodians offer HSA accounts, some with investment options that are similar to an IRA account. The investments chosen should reflect your risk tolerance and time horizon for the money just like any other investment account. Just like an IRA account you should shop around for the HSA account that best meets your needs including investment options and fees.
Qualified medical expenses
Qualified medical expenses include:
- Health insurance coinsurance and deductibles
- Most medical and dental expenses
- Vision care
- Prescription drugs and insulin
- Medicare premiums for those 65 or older
- A portion of the premiums for a tax-qualified long-term care policy
Health Savings Accounts and retirement
For those who can afford to cover some or all of the medical costs not covered by their insurance policy while they are working, HSA contributions can serve as an excellent supplement to their other retirement savings in IRAs, 401(k)s and elsewhere.
Money in the HSA can be saved until retirement to cover qualified medical costs. This can make your other retirement savings go farther. Remember the money comes out tax-free for qualified medical expenses. In addition your contributions are made on a pre-tax basis (note some plans allow for after-tax contributions as well).
The Bottom Line
With the cost of healthcare in retirement continuing to increase, the health savings account is increasingly being viewed as an additional retirement account. If you have access to one, consider funding an HSA account to help supplement your other retirement savings efforts.
Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner.