Use Your HSA to Cover Health Care Costs in Retirement

​Do you have a health savings account, also known as an HSA? You’re not alone. According to a study from America’s Health Insurance Plans (AHIP), nearly 20 million Americans are enrolled in an HSA.1
 
An HSA can be a valuable tool to help you pay for deductibles, copays and other out-of-pocket health care costs. They can be especially helpful for those emergency costs that you don’t factor into your regular budget.
 
If you’re like many Americans, you probably use your HSA to pay for short-term, unexpected costs. Your child suffers a sports injury, so you take money out of the HSA to cover the copay. Or you need to buy medicine for an illness, so you use HSA funds to pay for the prescription. There’s nothing wrong with using an HSA as a short-term reserve account for health care costs. In many ways, that’s why HSAs exist. 

However, you also may want to view your HSA as a retirement account, much like your 401(k) or IRA. Consider allocating a portion of your HSA funds as long-term savings, not to be used for short-term health care costs. Below are three reasons why your HSA could serve you well in retirement:

Medicare only covers a portion of health care expenses.
Like most retirees, you will probably benefit from Medicare after you turn 65. However, Medicare won’t cover all your health care costs. The truth is that Medicare pays for only a portion of most medical expenses, and many other costs aren’t covered at all. In fact, Fidelity estimates that the average 65-year-old retired couple will pay $260,000 on out-of-pocket health care expenses over the course of their retirement.2
 
Without a funding strategy in place, you’ll have to pay for those costs with retirement savings from your 401(k), IRA or other assets. That could limit your ability to live the kind of lifestyle you want for yourself. Instead, use your HSA as a long-term savings vehicle to pay for those future costs. You can then maintain your retirement assets to pay for more enjoyable expenses, like travel, hobbies or spoiling your grandchildren.

You can use your HSA as a long-term savings vehicle.
As mentioned, there’s nothing saying you have to use your HSA funds in a given calendar year. Your HSA assets stay in the account as long as you keep them there, even for years or decades.
 
Additionally, growth in the HSA is tax-deferred. That means you don’t pay taxes on your HSA inside the account. That tax deferral may allow you to grow your funds faster than you would in a taxable account. Tax deferral may make an HSA a powerful long-term growth vehicle.

An HSA generates tax-efficient distributions.
Health care costs will likely be a major expense in your retirement, but so too will taxes. You may pay taxes on everything from Social Security benefits and pension payouts to IRA distributions and more. You should consider any opportunity to reduce your tax burden.
 
An HSA offers tax-deferred growth, but it also allows for tax-free distributions as long as the funds are used for qualified medical expenses. The definition of “qualified” is fairly broad, so nearly any medical cost will likely count. That means you can grow your money tax-deferred and then withdraw it tax-free to pay your health care expenses.
 
Ready to use an HSA to fund your health care costs in retirement? Let’s talk about it. Contact us today at Carstens Financial Group. We can help you analyze your needs and develop a plan. Let’s connect soon and start the conversation.

 
1https://www.ahip.org/new-census-survey-shows-continued-growth-in-hsa-enrollment/
2https://www.fidelity.com/about-fidelity/employer-services/health-care-costs-for-couples-in-retirement-rise



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