Seniors Make This Costly Mistake When Saving For Health Care Expenses

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Newspaper clippings on health spending

Older Americans have the opportunity to be healthier and richer, but an ill-advised financial trend plagues them.

A large percentage of American seniors who save to cover their health care expenses are skipping tax-efficient ways of accumulating such funds, study finds. Researchers at the University of Michigan surveyed more than 2,000 people between the ages of 50 and 80 to find out if they were saving for medical care and, if so, how. The results indicate that many older Americans are not saving at all for health care expenses. Almost as concerning, however, the survey found that among those who save, many do not use tax-efficient means to do so.

Consider working with a financial advisor while you save for health care and other expenses.

Choosing not to seek treatment

In January of this year, the University of Michigan’s National Healthy Aging Survey asked a national sample of more than 2,000 adults, aged 50 to 80, about their concerns in 2020 about the health care needed in the future and their savings for health care. The survey found that 13% delayed seeking medical attention because of concerns about the cost, 12% needed medical attention but did not get it because they could not afford it, and 15 % had problems paying their medical, dental or other bills.

In addition, they were pessimistic about the future: 18% were not at all confident that they had enough money to pay for health expenses next year.

Among the 71% of adults surveyed who had not put money aside to pay for their health care in the past 12 months, 40% said they already have enough savings to pay for the health care they need. might need. More than one in four people who had not saved said it was because they could not afford it. Other less common reasons were for not needing health services (18%) and not having thought about them (13%).

How savers accumulate funds for health care

Less than one in three adults (29%) said that in the past 12 months, they had put money aside to pay for health care expenses before they needed it. Savers put money aside in several ways.

Health savings accounts – The study found that only 5% of adults put money into health savings accounts (HSAs) before they needed it. An HSA, which must be paired with a high-deductible health plan, allows you to invest for your future medical expenses, while enjoying special tax benefits. Your contributions, which are before tax, reduce your taxable income and your money grows tax-free. Plus, your withdrawals are tax-free as long as you use the money for qualifying medical expenses. Since an HSA is yours and not your employer’s, any unused funds in the account belong to you and that money continues to grow tax-deferred.

The IRS sets HSA contribution limits each year. But these are generally high. For 2021, the maximum HSA contribution is $ 3,600 for a self-directed plan or $ 7,200 for a family plan. But if you are at least 55 years old, you can make an additional catch-up contribution of $ 1,000 into your account. For 2022, the maximum HSA contribution is higher: $ 3,650 for a self-directed plan or $ 7,300 for a family plan. The catch-up contribution limit for people aged 55 and over remains at $ 1,000 in 2022.

Flexible expense accounts – The study also found that only 9% of those polled said they put money in Flexible Spending Accounts (FSA) before needing medical attention. FSAs are employer-provided accounts and do not require a high deductible health plan, so you can combine it with a low deductible health plan. Employers can contribute to these accounts but are not required to. These plans can be used to cover copayments, deductibles, certain medications, and various other medical and dental expenses. You pay no taxes on contributions, which means you’ll save an amount equal to the taxes you would have paid on the money set aside. Even though FSAs are provided by the employer, you can carry up to $ 550 of unused funds to the next year or have a 2.5-month grace period to use the money the following year.

In order to get an FSA, you must register during your employer’s annual open registration period, usually in the fall. Unlike HSAs, your FSA contributions do not earn interest, and since these plans are provided by the employer, you lose these accounts if you quit your job. The contribution limit for medical ASPs (which are different from dependents’ ASPs) for 2021 and 2022 is $ 2,750 per person, as for 2020. For married couples, each spouse can put up to $ 2,750 in their own. FSA account.

Health reimbursement accounts – Only 5% of adults aged 50 to 80 reported having a health reimbursement account (HRA). These are employer-funded group health plans from which employees are reimbursed – tax-free – for eligible medical expenses up to a fixed dollar amount per year. Employers claim a tax deduction for reimbursements they make through HRAs. Even if you don’t need to pair an HRA with an HDHP, you should still link it to a group health plan as determined by your employer.

Unused amounts can be carried forward for use in subsequent years. Unlike HSAs, HRA funds belong to the employer, who decides how much to fund for employee HRAs. If you leave an employer who sponsors an HRA, the employer keeps the money in the account.

Bank accounts – Bank accounts were used by 19% of adults surveyed. Bank accounts do not offer the tax benefits of the HSA, FSA, and HRA, and yet they are much more popular among Americans who spend money on health care.

Who puts money aside for health expenses

Older man trying to figure out how to pay his medical bills

Older man trying to figure out how to pay his medical bills

Saving for health care in one of these accounts in the past 12 months was more common among those aged 50 to 64 than among those aged 65 to 80 (34% vs. 22 %). More educated people also tended to save for health care at higher rates: people with at least a bachelor’s degree were more likely to have saved for health care in one of these accounts over the past 12 years. months than those with a high school diploma or less (38% vs. 22%). Additionally, people with an annual household income of at least $ 100,000 compared to less than $ 30,000 (39% versus 19%) were more likely to save for health care expenses.

Of those who put money aside for health care in HSAs, FSAs, HRAs, and bank accounts in the past 12 months, 44% saved $ 2,000 or more, 18% saved from $ 1,000 to $ 1,999 and 24% saved less than $ 1,000.

Those who save for health care in simple bank accounts lose the opportunity to take advantage of the tax benefits offered by HSA, FSA and HRA.

The bottom line

HSA documents

HSA documents

Large numbers of Americans between the ages of 50 and 80 have not saved up for health care expenses. Not only that, but many of those who have saved are not doing so in a tax-efficient manner using the HSA, FSA, and HRA. Those who save in a tax-efficient manner tend to be wealthier, healthier and better educated than those who are not. As health insurance plans require people to pay more of their health care out of their own pockets, for example through high deductibles, these tax-efficient accounts can help people avoid having to choose. between getting health care and not getting it.

Healthcare advice

  • It can be difficult to ensure that your financial plan is as tax-efficient as possible. This is where a financial advisor can come in handy. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors in your area, and you can interview your correspondents free of charge to decide which one is best for you. If you’re ready to find an advisor who can help you reach your financial goals, start now.

  • Here are several alternatives to explore if you are having difficulty saving for health needs.

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The post Seniors Make this Costly Mistake When Saving for Health Care First appeared on the SmartAsset blog.

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