Posted by Alicia Waltenberger.
It was my father who instilled in me those principles of self-sacrifice and deferred gratification that not only inspired me to save more, but also to pass knowledge onto others. Having practiced what he preached, he looked forward to an early retirement: He’d contributed to all the 401(k) plans that came his way, opened multiple IRAs, and even had the foresight to convert them to a Roth IRA—setting himself up with enough tax-free income to enjoy his golden years in comfort—if not splendor. There was so much he planned to do while in good enough health to pursue his passions and travel.
There was just one thing stopping him from retiring early: If he left his current employer, he’d lose his healthcare coverage, leaving him uninsured until Medicare kicked in at age 65 (and even that is limited in what it actually covers).
As a family we’d seen first hand how ruinous and unpredictable healthcare costs can be in retirement. My grandparents had gone from living independently to an assisted living facility, where monthly fees were somewhere in the area of $10,000. To protect his nest egg, there was no way my father was risking even a day of non-coverage. One recent estimate is that the average 65-year-old couple could pay almost $490,000 in total health-related costs throughout retirement.1
Big companies may offer their employees a high-deductible health plan (HDHP), meaning we’re liable to pay out-of-pocket expenses for treatments and medication before the insurance even kicks in. And the dollars in your pocket come out of your paycheck—that is, after-tax dollars.
I discovered last year that there’s a great way to pay for all those prescriptions and minor procedures using pretax dollars, reducing your overall healthcare costs.
What is an HSA?
Anyone with a deductible that’s higher than $1,300 ($2,600 for a family), is eligible to open something called a Health Savings Account, or HSA for short. Both employees and the self-employed may be eligible, and contributions are not subject to federal income tax.
It’s easy to contribute and—as with 403(b) contributions—I don’t miss the money because it comes directly out of my paycheck. The best part: Contributions are not subject to income tax. An individual can put up to $3,450 per year ($6,600 for a family plan) into an HSA (2018 limit), with people aged 55 or over able to put in an additional $1,000.
And unlike a 403(b), the funds you withdraw (for qualifying medical expenses), and any growth on those funds, won’t be taxed either.
Why hadn’t I opened one before? Well, like most Americans I hadn’t really heard of a HSA, or maybe confused it with an FSA (Flexible Spending Account). With an FSA, you “use it or lose it,” whereas an HSA balance rolls over each year, even if you change jobs. After age 65 (or when you become eligible for Medicare), you can withdraw the funds for non-medical expenses without incurring a penalty.
An investing tool that can benefit the healthy
The HSA is similar to an IRA in another crucial respect: You may also get to choose how your funds are invested, with a selection of mutual funds to choose from, giving your money the potential to grow. As well as the tax-free contributions and withdrawals, any gains on your investment (before you’re eligible for Medicare) will be tax-free. That’s why some savers are treating it as another savings tool, especially those who have already maxed out their annual 401(k) and IRA contributions, and are in such good health that they can afford to let the money just grow.
Of course, none of us can predict with any certainty what our future medical expenses will be, and HSAs were designed to manage that very risk. However, there are lifestyle changes that you can make to reduce the risk of getting ill and incapacitated in the first place (check out the links below for tips on staying healthy and reducing medical costs in retirement). Healthier seniors are able to stay independent for longer.
My father set a good example in that area too: Having cut out drinking, smoking and sugary treats in favor of daily walks and twice weekly runs, he’s in great shape physically as well as financially. Though you can’t contribute to an HSA after age 65, it’s a vehicle he may have liked, appealing to both his healthcare-conscious and financially-savvy sides.