The news is in: The number of high-deductible health plans (HDHPs) is on the rise, and the trend shows no signs of slowing down.

The reasons are simple: HDHPs have lower premiums, and employers in particular (through whom most Americans still receive insurance) are implementing HDHPs as part of a strategy to contain costs and promote cost sharing while still offering competitive benefits that will attract and help retain quality staff.

If your employer-sponsored plan is an HDHP, then you probably know at least a little something about health savings accounts (HSAs). According to the Kaiser Family Foundation, in 2015 roughly a quarter (26%) of employers offered workers an HDHP option. Of that 26%, 20% paired the HDHP with an HSA.  (For related reading, see 7 Mistakes to Avoid When Buying Health Insurance.)          

You’re eligible to open an HSA so long as:

  • You’re not covered by another healthcare plan
  • You can’t be claimed as a dependent on someone else’s tax return
  • You’re not on Medicare.

Who Needs an HSA?

If you have an HDHP, you do. An HSA allows you to set aside pre-tax dollars (the maximum an individual may contribute in 2016 is $3,350) in an interest-bearing account, then withdraw funds as needed for qualified medical expenses, such as office-visit copayments, prescription drugs and emergency-care visits. You own the account, not your employer, which means the account is fully portable and goes when and where you do. (See also Pros And Cons Of A Health Savings Account (HSA).)

Use an HSA for Retirement

Even if you’re fortunate enough to have minimal healthcare expenses, if you have access to an HSA, you definitely should open one. Unlike a mostly “use it or lose it” flexible spending account (FSA), all HSA funds that aren’t withdrawn roll over from year to year. As long as you meet the IRS qualifications, you can continue to make contributions each year into your HSA account.

In fact, your HSA  can be an excellent retirement tool (see How to Use Your HSA for Retirement). Your HSA monies can be withdrawn at any time without penalty as long as you apply them to medical expenses. And when you use the funds in your HSA account for medical expenses after you reach retirement age, your withdrawals are free from federal income tax. This is a key advantage over a conventional retirement fund such as a 401(k). If, in retirement, you need the funds in your HSA for non-medical expenses, you can withdraw them and pay the tax due, just as you would funds from a 401(k). This tax advantage is the number-one reason why you should avoid drawing on your HSA for current medical expenses and let it accumulate in an investment account. Read on for three more reasons.                  

Three More Reasons to Leave HSA Funds Alone 

  1. Studies have shown that most people underestimate healthcare costs in retirement, and they aren’t saving the money they’ll need. An HSA is a good way for you to get ahead of the curve. And remember, when you use HSA funds for qualified medical expenses, you don’t pay taxes. Ever.
  2. Studies also show that most people aren’t saving enough for retirement, but the sooner you start, the larger your nest egg will grow (see Why Save for Retirement in Your 20s?). An HSA, which allows you to use the money for medical expenses in addition to all the other costs of retirement, could be an ideal savings vehicle to get you going.
  3. If you're not yet 65 and withdraw your HSA money for any reason other than to pay for qualified medical expenses, you’ll face a stiff penalty (20%), but it’s still good to know the money is there if you ever find yourself needing it for a rainy day. However, it won't be there later if you spend it now.

A Word of Caution

Healthcare is expensive, and some people struggle to pay for it. While consumer-driven healthcare is meant to make consumers more intelligent users of the system, some claim the high costs are causing consumers to delay or even forego medical care altogether. That’s a dangerous choice to avoid if at all possible because in the long run, unaddressed medical issues tend to cost more, both financially and personally.

For that reason, saving your HSA monies rather than attending to your health is not recommended. However, if you’re financially able to use post-tax dollars for your current healthcare costs while saving your pre-tax HSA dollars for later, you’ll probably be glad you did.

The Bottom Line

Paying for current medical expenses with post-tax dollars while allowing pre-tax (HSA) dollars to accumulate for post-retirement expenses, particularly medical expenses, could be an excellent strategy for a healthy and comfortable retirement.

 

 

 

 

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