What will health care look like in the coming decade?
Those who say that the only certainties in life are death and taxes probably haven’t retired yet, because health care costs in retirement definitely would belong on that list.
Why? Because according to the latest Bureau of Labor statistics (2016 data), households run by someone age 65 or older spend an average of $3,800 a month on health care costs (two-thirds of this for insurance), which doesn’t include long-term care costs.
While it’s unlikely you can avoid all health care expenses in retirement, there are resources that can help ease that burden a bit. For instance, consider a health savings account (HSA).
Think of a health savings account as a mini retirement fund set up specifically for health care expenses. Contributions are tax deductible, just like contributions to traditional IRAs and 401(k)s.
The big difference: When you make an HSA withdrawal, if the money is spent on qualified medical expenses, it’s not income-taxable.
However, you cannot open an HSA account unless you’re enrolled in a high-deductible health insurance plan. This means that the plan will need to have a deductible of at least $1,350 for individuals or $2,700 for families with a maximum out-of-pocket spending limit of $6,750 for individuals or $13,500 for families.
There are also limits on how much you can contribute to an HSA account in a given year. In 2019, that’s $3,500 for individuals and $7,000 for families. Account holders over age 55 can contribute an additional $1,000 per year.
While HSAs don’t have to be used strictly for medical expenses, the penalty for making withdrawals for non-medical expenses is 20 percent, plus your withdrawal is subject to income taxes, so it’s best to plan to use this account for health care expenses.
Of note: Insurance premiums generally are not considered qualified medical expenses unless the premiums are for:
▪ Long-term care insurance (traditional, not hybrid);
▪ Health care coverage under COBRA;
▪ Health care coverage while receiving unemployment benefits;
▪ Medicare and Medigap coverage if you are age 65 or older.
Having a separate fund set up to help with your health care costs in retirement is a smart idea. If you are hit with a big health care bill in retirement, you can access your HSA to cover these costs tax-free and leave your IRA/401(k) alone to cover more predictable living expenses.
It’s best to open an HSA account as early as possible, when retirement is still a few decades away. Then, try to save as much as you can into the account and not touch that money until retirement. (Remember, according to Fidelity Benefits Consulting, the average couple retired at age 65 will spend $285,000 in retirement).
Keep in mind that your eligibility to add to an HSA account may change over the years. If you switch insurance plans to something that isn’t HSA-eligible, you won’t be able to contribute to your HSA account, but you can keep what you’ve already accumulated.
Health care expenses can be one of your biggest costs in retirement, and taxes will add to withdrawals needed from your retirement savings accounts.
Having HSA savings as part of your overall retirement spending strategy will help you meet one of those certain needs and give you a tax break at the same time.