Save for retirement and medical insurance? An HSA helps to do each on the identical time

Retirement planning overlaps more with health planning than you might think. Fortunately, you can prepare for both at the same time.

Sure, retirees will have many non-healthcare related expenses, such as housing, food, travel, and recreation. And Medicare covers much of the health care expenses that retirees have.

But there are still many retirement health costs that are not paid for by government programs. Fidelity Investments believes that two spouses who turn 65 should budget about $ 300,000 in combined health care expenses out of their own pocket over the remainder of their lives. The Employee Benefit Research Institute estimates the total cost could average $ 325,000.

“This is a big change” in the out-of-pocket health costs that retirees are likely to face, said Jake Spiegel, a research fellow at EBRI. “Medicare doesn’t cover all costs.”

So what can you do to meet such a daunting obligation? Save, invest and get the best account options out there.

Mainstream retirement accounts, including 401 (k) plans and Roth Individual retirement accounts, are a big part of the equation. But you should also consider health savings accounts, although these tax-deferred vehicles are not for everyone.

Benefits of the health account

HSAs are flexible investment vehicles and portable – that is, an account stays with you even if you change jobs or leave. They usually offer a range of investment options and, at best, triple tax benefits.

The accounts are an “absolutely fabulous” way to invest and minimize taxes, said JP Morgan executive director Sharon Carson when she recently spoke at an event hosted by the Employee Benefit Research Institute.

What tax advantages? Initially, the contributions are deductible. Second, the account balances grow in a tax-protected manner. Third, withdrawals are tax-free when used to cover a range of healthcare expenses. Expenses that may be eligible for tax-free treatment include surgery, doctor visits, eye care, Medicare rewards, dental exams / fillings, nursing home help, and prescription medication.

You could even say that HSAs have a fourth tax benefit as there are no minimum withdrawals required. For this reason, and because withdrawals are usually tax-free anyway, you don’t have to worry that you will slip into a higher tax bracket as a result of withdrawals or make your social security benefits partially taxable. This is not the case with traditional IRA withdrawals, which can put your social security benefits in the taxable category.

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It is hard to find many disadvantages of health savings accounts due to their tax characteristics. But the plans don’t work for everyone, and the tax benefits shouldn’t overshadow your health insurance needs.

One problem is that not all employers offer the health savings account as a benefit option. And even when they are available, HSAs are limited to employees who sign up for high-deductible health insurance. These plans have lower premiums that save you money, but the high deductibles can be prohibitive for people living on a tight budget or expecting high medical costs.

(You may be able to open an HSA outside of work, but must combine it with high-deductible insurance.)

Another drawback is that HSA dues are capped at $ 3,600 for singles and $ 7,200 for families in 2021, and an additional $ 1,000 for people 55 and older. That means it would take you years, or possibly decades, to amass enough cash to seriously cover anticipated healthcare costs in retirement.

It’s also worth noting that HSA withdrawals not used for qualifying healthcare expenses are taxable (plus a 20% penalty if made before 65. Once enrolled with Medicare, you will not be able to contribute to a plan However, you can still use account proceeds to pay medical expenses. You can also use HSA withdrawals to pay for medical expenses for your spouse and loved ones.

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Save or Invest?

In order to amass a meaningful sum of money, you want to deposit regularly over many years, avoid short-term withdrawals and invest your balance in growth assets instead of simply saving it. With HSAs there is no “use it or lose it rule,” said Spiegel, which means that unused account balances are carried over to future years. (This is not the case with flexible savings accounts, a separate type of medical-grade vehicle that HSAs are often confused with.)

People starting an HSA early could have two, three, or four decades to work – plenty of time to take advantage of riskier growth investments like stock funds.

Yet the majority of HSA owners and account usage is not, as a recent Fidelity study found, that people rely primarily on money market funds or other short-term instruments. Less than 10% of the HSA dollar is invested in stock funds and other riskier investments, meaning many people are missing out on a significant opportunity to make higher returns.

Since HSA dollars can be tapped at any time to pay for medical expenses – now, next year, or decades later – there is some uncertainty about when you will need the money. That explains why a lot of people aren’t investing as aggressively as they maybe should.

One way to deal with this time uncertainty is to maintain a balanced mix of investments. For example, Fidelity offers two funds for use in the HSA programs it manages. One option, the Fidelity Health Savings Fund, holds about one-third of its assets in stocks and the remaining two-thirds in bonds and cash. The other fund, the Fidelity Health Savings Index, holds about 45% in stocks and the remainder in fixed income.

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Prioritize your posts

If you are a diligent saver, there is a good chance that you are depositing funds into various accounts. But are you doing this in an efficient manner based on liquidity, tax savings, and other factors? Carson made some suggestions.

Your first recommendation would be to build up an emergency reserve of cash or money market funds that you could bridge for three or six months if necessary. Once that goal was met, she suggested reaching out to HSAs to invest and minimize taxes (provided you have access to and agree to high deductible plans).

After that, Carson suggested contributing to 401 (k) retirement plans, if available, at least to the extent that you maximize the employer-matching funds. Fourth, she recommended paying off high-interest debts like credit card balances or student loans.

Assuming you have additional funds available, you could then repay lower-interest loans, contribute to Roth or traditional IRAs, or invest in various taxable accounts, she said. Retirement accounts are important, of course, but “HSAs are more efficient from a tax standpoint,” she said.

Your recommended savings priorities are not suitable for everyone. But for people who save regularly, pay for healthcare bills with other funds before retirement, and thereby grow their HSA balances, this is a strategy that can pay off well in retirement.

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