Managing healthcare costs in retirement
Even if you've been a loyal saver over the years, the reality is that healthcare expenses in retirement can take a big bite out of your budget. Fortunately, there are certain steps you can take now that may help offset rising healthcare costs in retirement and keep your finances healthy. One step could be to open a Health Savings Account (HSA).
What is an HSA?
Simply put, an HSA combines a high-deductible health insurance plan with a tax-favored savings account. It's similar to a traditional IRA in that contributions to your account are 100 percent tax-deductible and your money grows tax-deferred. Moreover, any withdrawals you make are tax-free, provided that funds are used to pay for qualifying medical expenses. An HSA is different from a Flexible Spending Account in that the money in your HSA doesn't come with a use-it-or-lose-it clause. In other words, it doesn't have to be used within a year or else forfeited. The money in your HSA is all yours.
Is an HSA a good way to manage costs in retirement?
An HSA allows you to save money to cover healthcare expenses in the future. So when you need it, you could have a pool of money earmarked especially for healthcare. That can allow you to have the cash on hand and not depend completely on your savings.
However, the rub with HSAs is that you are not allowed to make non-medical withdrawals prior to age sixty-five without incurring a 20 percent tax penalty and income tax. And while non-medical withdrawals can be made penalty free once you hit age 65, you'll still be subject to income taxes.1 The reason for these rules is so that you learn to budget accordingly and don't end up squandering away your future healthcare money.
The good news (and why HSAs can be a great way to manage costs in retirement), is that as long as you use your HSA money for qualifying medical expenses - which include deductibles, copayments, coinsurance, etc. - that money is entirely tax-free.
To be eligible for an HSA, you must be signed up for a high deductible health plan (HDHP) and have no other health insurance. In addition, there are minimums required by the government for an HDHP to be eligible for an HSA. For current eligibility information on the minimum annual deductible, visit the IRS website.
If you're considering an HSA, there are some great online calculators that could help you determine the potential savings of an HSA compared to your current health insurance plan, any potential tax savings, and how much you may be able to save with an HSA.