According to a recent study from Fidelity, the average retired couple will spend nearly $260,000 on out-of-pocket health care costs.1 Those costs include things like deductibles, copays, prescription drugs, premiums and much more. Fidelity’s estimate does not include costs for long-term care or in-home assistance.
If Fidelity’s health care cost estimate surprises you, you’re not alone. Many retirees assume that Medicare will cover all their medical expenses, but that assumption is usually incorrect. While Medicare is a valuable resource, it usually covers only a portion of your expenses. Some types of care may not be covered at all. That means many retirees face sizable bills that they must pay out of pocket.
That’s why it’s important for your retirement strategy to include a health care funding plan. You may want to consider using a health savings account (HSA) as part of that plan. An HSA is an account established specifically for health care saving purposes. You contribute to your HSA straight from your paycheck and then invest the funds according to your goals and needs. When you have health care costs, you can simply use your HSA to pay the bill or to reimburse yourself for the expense.
Still not sold on using an HSA as part of your retirement strategy? Below are a few reasons why an HSA could be an important funding tool for you:
HSAs are popular savings vehicles because they offer a great deal of tax efficiency. Your contributions to your HSA may be deductible, depending on your income and the amount of the contribution.
Your contributions then grow on a tax-deferred basis while they stay in the plan. That means you don’t pay taxes on any growth that accumulates inside the HSA. You can defer those taxes as long as you’d like.
In fact, you may not have to pay taxes on the growth at all. That’s because HSA distributions are tax-free as long as the funds are used for qualified medical expenses. If the money is used for an expense that isn’t qualified, you could face taxes and possibly early distribution penalties if you’re under age 59½. As long as you use the money for health care, however, your HSA can be a highly tax-efficient savings vehicle for medical expenses.
Many people assume that they must use their HSA money within the calendar year that they make their contributions. The truth is that your HSA balance can carry over from year to year. There’s no requirement to use it within a certain time frame. That means your HSA funds have the potential to grow and compound over time.
Also, your HSA balance isn’t tied to your job. Although your contributions may come out of your paycheck, you keep your balance with you when you leave your employer. You can keep contributing to your HSA at each job you have, and even after you retire.
Finally, while HSA funds must be used to pay for medical expenses, the IRS actually has a very broad definition of what constitutes a qualified expense. Almost any payment to a medical services provider, such as a doctor or hospital, is considered qualified. Copays for prescriptions and other services qualify. Even payments for medical supplies can qualify as a medical expense.
You could also use your HSA to pay for long-term care costs. For instance, you may need to pay a home health aide to come to your house and assist with basic tasks. Or you may need to modify your home to accommodate a wheelchair. You could use your HSA funds to pay for those costs.
Ready to develop your retirement health care funding strategy? Let’s talk about it. Contact us today at Intelliplan Financial. We can help you analyze your needs and create a plan. Let’s connect soon and start the conversation.
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