HSA 101: What You Need to Know
Healthcare expenses affect everyone, whether you’re young, healthy, retired or face new medical conditions. As people research their options, we at Linscomb & Williams are being asked more and more about Health Savings Accounts (HSAs). So, we want to answer some of the more common questions. As a starting point: What is a Health Savings Account and how can one benefit me?
What is a Health Savings Account?
A Health Savings Account is what the name implies – it’s a savings account for qualified health-related expenses. But there are two little known secrets about HSAs.
- Despite the "Health" part of the label, once you hit age 65, you can use the money in this account for anything. You could use it to fill in the gaps in your Medicare coverage, supplement your retirement income or fund your next vacation.
- Once you save a certain amount in your HSA (usually around $2,000), you can invest your funds for long-term growth. Many HSA providers allow participants to invest in index funds, mutual funds and ETFs. Some even let you buy stocks and bonds. So the term "Savings Account" is a bit misleading.
Once you set up your account, your HSA provider will send you a debit card. You can either pay for expenses with the card or hang on to receipts and submit a reimbursement claim later on.
The Benefits of a Health Savings Account in Retirement
HSAs represent tax-free money. You make pre-tax contributions to these accounts, and your earnings grow tax-free. You can make tax-free withdrawals for qualified medical expenses (or any expense once you’re age 65).
This is in contrast with 401(k)s and traditional IRAs, where you pay taxes when you start taking withdrawals. With these accounts, you also have to take Required Minimum Distributions (RMDs) once you hit age 70-½. But neither of these rules apply to HSAs. And unlike Flexible Spending Accounts (FSAs), your balance carries over from year to year. It’s not a “use it or lose it” type of situation.
To put this in perspective, look at the chart below to see how much money you’d have after taxes if you invested $5,000 a year in an IRA versus a HSA.
*Based on a 5 percent return
**Based on someone married filing jointly for the 2020 tax year
While pre-retirees should try to max out their 401(k) and IRA contributions each year, you shouldn’t ignore the benefits of supplementing your savings with a HSA.
Healthcare costs are an important financial issue in your planning. Couples who are 65 years old today can expect to pay an average of $280,000 in healthcare costs throughout retirement. With sky-rocketing costs like these, it’s no wonder people are more afraid of medical bills than sickness.
Many retirees get free or subsidized Medicare once they turn 65, but gaps in coverage still leave them with hefty medical expenses.
Do I Qualify For a HSA?
To qualify for a HSA, you must be younger than 65 and enrolled in a high-deductible healthcare plan. For 2020, a high-deductible plan is any plan with a deductible of at least $1,400 for individuals or $2,800 for families. Once you turn 65, Medicare eligibility kicks in and you no longer qualify for tax-deductible HSA contributions.
For 2020, you can contribute up to $3,550 if you have an individual plan and $7,100 if you have a family plan. If you’re 55 or older, you can make a $1,000 catch-up contribution each year.
What Are Qualified Medical Expenses?
HSAs can be a huge asset to retirees because they cover every-day medical expenses not covered by Medicare. There are many costs that qualify, but some common ones include:
- Dental expenses
- Health insurance deductibles
- Hearing aids
- Hearing exams
- Medical bills (including those for hospital stays and physical therapy)
- Medicare premiums
- Long-term care insurance premiums (may not cover 100 percent)
- Office visit copays
- Prescription drugs and insulin
- Vision care
- Wheelchairs and walkers
You can also use an HSA to cover some long-term-care related expenses such as home health aides, nursing home fees, and meals and lodging while receiving extended medical care away from home.
3 Tips for Maximizing HSA Benefits
If you’re worried about healthcare costs in retirement, a HSA can be a great way to prepare for those unexpected expenses.
Here are 3 tips that can help you maximize this account’s benefits:
1. Don’t Spend it Right Away
This may seem counterintuitive, but you may want to delay using HSA funds as long as you can. If you have enough money to cover healthcare expenses now, pay for them out-of-pocket and save your receipts. This allows your HSA balance to continue growing, tax-free.
The IRS doesn’t require you to claim expenses in the year you incurred them. So, you can reimburse yourself for old medical expenses later on in retirement. This gives your money more time to compound and earn interest.
2. Invest it Wisely
HSAs shouldn’t be used as glorified savings accounts. Instead, invest the money as you would with your 401(k) or IRA. Talk with a financial advisor about diversifying your portfolio and hedging against various risks by investing in index funds, ETFs or mutual funds.
You may not have any control over who your HSA provider is, but you can typically control how your money is invested. Make sure your HSA investment strategy aligns with your goals, timeline and risk tolerance.
3. Be Strategic About Withdrawals
Minimizing taxes is important in retirement. If you find yourself in a situation where you need some cash, but withdrawing from a taxable account would bump you into a higher tax bracket, talk to your financial advisor about using your HSA. You may be able to cash in some of your old medical expense receipts and cover your costs with tax-free money.
The Bottom Line
If you qualify for a HSA, talk with a financial advisor about establishing your account, investing the funds and maximizing its benefits.
At Linscomb & Williams, we’re here to help you live your ideal life in retirement. Whether you need help reading through an HSA’s fine print or hedging against unexpected risks like healthcare in retirement, we’re here to guide you every step of the way.