Health Savings Accounts: Managing Retiree Health Care Expense

By Greer Gibson Bacon, CFP®

 

Each year, Fidelity Benefits Consulting conducts a study of retiree health care expense.  In 2016, it revealed a 65-year old couple retiring with traditional Medicare will need $260,000 in today’s dollars just to pay Medicare Part B and D premiums, coinsurance, copayments and deductibles1|2.  They’ll need another $130,000 to buy long-term care insurance3

Depending on your circumstance, a Health Savings Account (HSA) may be an effective way to manage these expenses.  Here’s why.

Tax Benefits

HSAs offer three major tax benefits, as highlighted below.  

Tax-deductible or tax-free contributions.  Your contributions are tax-deductible regardless of your income level and employer contributions are tax-free.

Tax-free earnings.  Earnings are tax-free.  Today, many HSAs offer a bank deposit option and broad array of low cost mutual fund options.  So, there’s plenty of potential.   

Tax-free withdrawals.  Withdrawals to pay “qualified medical expenses” are tax-free.  Other withdrawals are taxed as ordinary income and subjected to a 20% tax penalty. 

Flexibility

You may use your HSA to pay current expenses.  Or, if your circumstance permits, you may pay them out-of-pocket and grow your HSA for retirement.  Unlike a Flexible Spending Account, an HSA doesn’t have a “use it or lose it” provision.  Once you reach 65, the definition of qualified expenses broadens and you may use your HSA to pay Medicare Part B and D, Medicare supplemental and long-term care insurance premiums. 

Eligibility

You may only contribute to an HSA if you have an “HSA-qualified” high-deductible health plan (HDHP).  Since not all high-deductible plans are HSA-qualified, look before you leap.  Other requirements apply, as well. 

The good news is HDHP are growing in popularity with employers and individuals since they have lower premiums than most traditional plans.  In turn, this leaves employers and individuals with extra dollars with which to make HSA contributions. 

Is this is right for you?  That depends.  A combined HDHP and HSA may be a good choice if you’re healthy and can afford to fund an HSA or otherwise bear the risk of higher deductible and out-of-pocket expense.  A traditional plan may be a better choice if you’re not so healthy or can’t afford to fund an HSA or bear the related risk. 

For more information, see IRS Publication 969 or a professional advisor experienced in this area. 

2017 Limits

Self-only

Family

HSA Contribution Limit

$3,400

$6,750

HSA Catch-up Contribution (age 55 and older)

$1,000

$1,000

HDHP Minimum Deductible

$1,300

$2,600

HDHP Out-of-pocket Maximum

$6,550

$13,100

1The study assumes the couple lives to life expectancy, defined as 85 for the husband and 87 for the wife.  Keep in mind, life expectancy is an “average”, meaning half of us won’t live this long and half of us will live longer.  The more educated and affluent you are, the longer you’re expected to live. 
2This estimate doesn’t include Medicare supplemental premiums, most dental, vision, hearing and other expenses, or long-term care expenses.

3The study assumes a monthly benefit of $8,000 for 3 years with a 3% inflation rider.  It estimates 70% of those age 65 and older will need long-term care.  

 

This article first appeared in the December 2016 Spokane County Medical Society Magazine. The information referenced in the article is current as of date of publication.

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