Turn Your Health Savings Account (HSA) into a Retirement Tool

Planning for retirement now will only help you in the future, especially when you factor in the costs of health care in your golden years. According to Fidelity, it’s estimated that couples age 65 and older will spend an average of $275,000 (or $5,000 per year per individual) in out-of-pocket medical costs during their retirement.

Are your retirement savings on track to cover those health-related expenses and your general living expenses? If not, there are ways you can start preparing for these medical costs. One way is with a health savings account (HSA).

To qualify for an HSA, you must be enrolled in a high-deductible health plan, have no other health insurance and not yet qualify for Medicare. HSAs are designed to help people with high-deductible health plans pay for out-of-pocket medical expenses by allowing individuals and families to contribute pre-tax income into a separate account. What some people don’t know is that it’s also a great investment tool.

Why an HSA?

The big advantage of using HSAs to build up a fund for retirement is the triple-tax advantage. By that, we mean HSAs are:

• Tax-deductible: the money you add to your HSA can be deducted from your taxable income when you file your income taxes.
• Tax-free: withdrawals from your HSA are not taxed as long as they're used to cover medical expenses (unlike 401k or IRA accounts which are taxed no matter what).
• Tax-deferred: money you contribute, and all interest it accrues, are not taxable while in the HSA account. The funds are compounding year-over- year with your additions and interest for maximum returns.

Other benefits of using an HSA as a health care savings tool for your retirement include:

• Your total amount rolls over year after year.
• There are no required minimum withdrawals.
• Funds can be put into investment accounts for additional growth.
• Unlike most other retirement accounts, you’re not penalized for withdrawals before age 65.

HSA Contribution Tips

Using money from your HSA to cover health care costs when you retire enables you to pay for things like in-home nursing care, Medicare premiums and some long-term care services. You can make the most out of your HSA for retirement by following these steps:

1. Contribute as much as your budget allows each year.

The HSA contribution limit for 2019 is $7,000 per family. Take a look at your monthly and annual budget to decide on the maximum amount of money you can contribute.

If you’re having difficulty setting aside the funds from your budget, you can utilize the once-per-lifetime IRA transfer to move dollars from a retirement fund into your HSA to get it started.

2. Apply catch-up contributions if you’re over 55 years old.

If you’re starting your HSA at an older age or you want to contribute more once your salary increases later in life, individuals aged 55 or older are eligible to add an additional $1000 per year into their account. This is on top of the maximum HSA family and individual contribution guidelines. Note that you can no longer contribute to your HSA once you turn 65 and become eligible for Medicare.

3. Keep your receipts.

If you do pay out-of-pocket for medical costs, be sure to save your receipts as a record to reimburse yourself later. You can use your HSA to reimburse yourself for medical expenses incurred in the future, as long as you had the HSA when those fees were processed. Just keep a copy of all these transactions in case you’re ever audited.

The bottom line is that HSAs are tax-advantaged accounts that can assist in building up medical funds for retirement, when you’re likely to have more medical needs and at a higher cost. Learn more about starting an HSA with Blue Cross Blue Shield of Michigan.