When many investors save for retirement, we think of being able to afford our future living and traveling expenses. It’s also wise to consider our future health-care costs.
According to a recent report by HealthView Services, women will need to set aside nearly 20% more than men to cover health-care costs in retirement. The primary reason? Women who are 65 years old, on average, live about two years longer than men of the same age. Over their remaining life expectancy, a 65-year-old man could spend nearly $200,000 on Medicare premiums; a woman of the same age could spend over $235,000. These estimated costs do not include other health-care related expenses such as dental, vision and hearing services, some of which are not covered by Medicare.
One way to cover those future health-care expenses is through a tax-advantaged retirement vehicle called a Health Savings Account (HSA). An HSA is a savings account and any money that is saved can be used for out-of-pocket medical, dental and vision expenses.
To qualify for an HSA, you must have a high-deductible health plan with a deductible of at least $1,300 for individual coverage and $2,600 for families and a maximum limit on out-of-pocket expenses. For 2017, the maximum annual out-of-pocket costs are $6,550 for individuals and $13,100 for families. Once this limit is reached, the health plan is required to pay 100% of the cost of benefits covered for the remainder of the plan year.
How much can you contribute?
If your health plan fits that requirement, you can contribute up to $3,400 to an HSA and $6,750 for families in 2017. Similar to an IRA, there is a “catch-up” provision where account holders 55 and older can make an additional annual contribution of $1,000.
What are the advantages of an HSA?
An HSA was designed to work like retirement accounts such as an individual retirement account (IRA) or defined-contribution plans—with added tax benefits, including:
- Tax-deductible contributions
- Contributions and earnings grow tax-free
- A withdrawal is a non-taxable event if the distribution is applied to qualified medical expenses (qualified events can be defined as co-payments for doctor visits, hospital and dental care, prescription drugs or other IRS-approved expenses).
Can you use an HSA as a retirement-savings vehicle?
In addition to the attractive tax benefits, you can often invest your HSA funds in a wide range of investment options including mutual funds. You can choose to pay for medical expenses from your HSA account, or you can allow your funds to grow and take advantage of the tax benefits.
What if you need to make a withdrawal?
As long as the money is used for qualified medical expenses, HSA withdrawals can be made without a penalty and will be tax-free. Keep in mind that if you are under the age of 65, you will be subject to a 20% tax penalty if you make a withdrawal from your HSA for an unqualified medical expense. Rules are different for those over 65 years old.
Over a lifetime, medical bills can add up. With health-care needs likely increasing in retirement, make sure you have considered how to fund your future health-care costs in retirement. Even healthy people will have higher health-care costs as they are generally expected to live longer.
Based on your individual situation, an HSA may make sense. You can discuss tax-advantaged HSAs as well as any retirement vehicle with a financial advisor at Jemma Financial.
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Securities offered through M.S. Howells & Co., Member FINRA/SIPC. Advisory services offered through Jemma Investment Advisors, LLC, a registered investment advisor. M.S. Howells & Co. and Jemma Investment Advisors, LLC are not affiliated.