The joys of a health savings account and 5 ways to use it in retirement


A Health Savings Account (HSA) allows you to save money in a tax-efficient account and then withdraw money tax-free to pay for eligible medical expenses. Often the money is used while you are working. But you can also use your HSA in retirement to reduce your medical costs. It could also help you stretch your retirement savings.

“While no one can predict what their healthcare costs will be in the future, we estimate healthcare costs will increase by 4% per year, so the numbers can quickly become daunting,” says Kevin Webber, Wealth Advisor at Heritage Financial in Westwood, Mass. “HSAs can give customers some control over their tax bill when deciding how to pay for these health-related costs. “

A definition of health savings accounts

Before I explain how to best use a retired HSA, a brief definition:

In 2021, you can put up to $ 3,600 in pre-tax money ($ 4,600 if you’re 55 and over and $ 7,200 for a family or $ 8,200 for a family if you’re 55 and over) an HSA. Income from its investments is not taxed; neither are withdrawals for eligible medical expenses. But to qualify, you must have a high-deductible health insurance plan – a plan with a minimum deductible of $ 1,400 for an individual or $ 2,800 for a family. (About 35% of employers offer high deductible plans, according to Bank of America. BAC,

Before age 65, if you use HSA money for an ineligible medical expense, you will have to pay a 20% penalty tax on the amount you withdraw and the money you withdraw for that expense will be taxed as ordinary income.

You cannot continue to contribute to an HSA once you are on Medicare; if you do, you will have to pay tax penalties.

After your death, your spouse or partner can inherit your account and turn it into their own HSA. But any money your children inherit from your HSA will be fully taxable.

Some 30 million Americans use HSAs, says Jon Robb, senior vice president of Become, a Minneapolis-based HSA investment firm. Yes, only 45% of people who are eligible to open an HSA have actually opened one, according to the Institute for Healthcare Policy & Innovation at the University of Michigan.

On average, HSA holders over 50 had an average HSA balance of over $ 4,300 in 2020. According to Fidelity Investments, the average HSA owner has over $ 8,900 at 65 and $ 8,400 at 70 years.

While that’s a drop in the bucket compared to the estimated $ 300,000 an average 65-year-old couple will need for health care, it’s a good start.

Here are 5 ways to use an HSA in retirement:

1. Help bridge the gap with Medicare

Suppose you are 63 and a half years old and you lose your job or decide to stop working before you turn 65. You may not have access to retiree health coverage at this time, but you may be able to keep your employer’s plan under federal COBRA for up to 18 months. .

If so, you can use your HSA to pay these premiums and even health insurance premiums while receiving unemployment compensation.

“Using an HSA in the pre-Medicare scenario can help save on taxes,” explains Webber. “I have a number of clients who use their HSA to pay for their daily health care expenses. This gives them the option to delay using their IRA or 401 (k) to pay for premiums or medical expenses. Then, when in a lower tax bracket, they can convert some of their retirement savings into a Roth IRA to help reduce taxes on future withdrawals.

Here’s an example from Webber: “One of our clients, a software engineer, and his wife, a teacher, retired in their mid-60s and used their HSA to pay for their Medicare Part B premiums. Using the HSA was the right decision because her teacher’s retirement pension was generous enough to place them in the 22% marginal tax bracket. Spending the HSA allowed them to avoid taking IRA distributions to pay for Medicare, which would have been heavily taxed. “

2. Pay regular medical bills

Unless you are still covered by an expensive company health plan, you may be paying for vision, hearing aids, and dental care from your personal savings; Medicare does not cover them, but you can use your HSA money for them.

Other common expenses covered for HSAs include acupuncture, blood pressure monitors, chiropractic bills, ambulance costs, diabetes supplies, elective non-cosmetic surgery, and certain types of medical equipment.

Read also : Want to use your IRA to start your own business? Think again, says the new bill

3. Prepare for long-term care expenses

HSAs can also cover a portion of the costs of long-term care, but can only pay a limited amount for premiums on a long-term care insurance policy. For example, if you are between 61 and 70, you can use up to $ 4,520; up to $ 5,640 if you are older. Premium amounts greater than these figures are not considered medical expenses.

Former benefits consultant Nancy Helt, of Hingham, Mass., Uses her HSA to help pay for future long-term care expenses, but not for long-term care insurance.

“Together with my financial advisor, we chose not to take out long-term care insurance because the cost / benefit ratio available at the time did not seem logical,” Helt explains. “I have invested in several low cost index funds within my HSA which will hopefully continue to grow over the next 15 to 20 years. At this point, I may need to use these funds and other sources of retirement income to pay for long term care, home help, or home help for my husband or even for myself.

Learn more about HSAs here

4. Help cover health insurance premiums

You can also use your HSA to pay for certain Medicare expenses, including Medicare Part A, Part B, Part C (Medicare Advantage), and Part D premiums for prescription drug coverage. But you can’t hit an HSA for additional policy premiums or Medigap.

5. Pay personal expenses

Here’s one of the enticing secrets of an HSA: Once you’ve signed up for Medicare, you can also use an HSA account to pay for any ineligible medical expenses, like home renovations. You do not have to pay state or federal taxes for such expenses, but you must pay taxes on your investment earnings for these expenses.

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Your options for signing up for an HSA in 2022

If you are under 65, need health coverage, and want to open and contribute to an HSA in 2022, you may be able to enroll in an HSA-eligible plan on the government’s site. Look for “HSA” when you compare the health stock market plans for your condition. The registration period runs from November 1 to January 15, 2022.

You can get an HSA through a bank or other financial services company or through a debit card. Remember that conditions and fees vary by company. Some companies charge for opening or closing the account as well as a monthly maintenance fee.

Read: Get Triple The Tax Benefits With An HSA And Find An Affordable Health Plan While You’re At It

If you open or have an HSA, it is worth using the investing feature to build up tax-sheltered earnings. Yet a new report from the Employee Benefit Research Institute has found that very few HSA owners have invested their account balances. “On average, account holders appear to use HSAs as specialty chequing accounts rather than retirement accounts,” the report says.

David Conti is a New Hampshire-based writer, editor and content marketing consultant. He was an editor at Fidelity Wealth Management and now writes on personal finance, aging and wealth for national publications. Contact him on LinkedIn.

This article is reproduced with permission from, © 2021 Twin Cities Public Television, Inc. All rights reserved.

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