By Steven Neeley, CFP®
A recent Kiplinger article talked about some of the biggest regrets that retirees have, and one of them was procrastinating when it comes to retirement planning. Sadly, many Americans wait until it’s too late to start planning. Don’t be one of them!
One often overlooked method of retirement planning is taking advantage of Health Savings Accounts (HSAs). A study published earlier this year by Fidelity Investments found that couples 65 and older can expect to spend close to $315,000 after-tax dollars on health and medical expenses throughout retirement. Spending that kind of money on healthcare could easily ruin your retirement plans.
If you are in good health, have a savings cushion, and are in one of the higher tax brackets, you should consider switching to a high-deductible health plan and maxing out an HSA every year.
Here’s How They Work
- You need to belong to a high-deductible health plan with a minimum deductible of $1,400 for an individual and $2,800 for a family.
- In 2022, HSA contribution limits are $3,650 for individuals and $7,300 for families. There’s also a $1,000 catch-up for those over the age of 55.
- Many employer-provided health insurance plans offer a high deductible/HSA option, and they usually allow you to fund the plan right out of your paycheck.
- HSAs can be used to pay for qualified medical expenses, including deductibles, copays, prescriptions, dental, and vision.
Benefits
- Contributions to HSAs are pre-tax, which means that if you contribute the $7,300 max for a family, and you are in the 32% marginal tax bracket, you will save more than $2,300 in taxes per year. Not bad.
- You can invest the HSA savings in a brokerage account that will grow tax-free, and there are no taxes on withdrawal as long as it’s for qualified medical expenses. This is a great way to fund health care expenses in retirement, as the HSA can even be used to pay for assisted living facilities or home health care, which can be costly and drain savings fast.
- Having a cushion to pay for healthcare costs in retirement means you won’t have to spend down your other retirement accounts as quickly, which may even allow you to hold off on claiming Social Security.
There are a couple of drawbacks you should be aware of. First, if you declare anyone other than your spouse as the beneficiary, say, your children or estate, for example, the account will be taxed in full upon your death. It will pass tax-free to your spouse, however, as long as you’ve named them as the beneficiary.
The second drawback to keep in mind is that you will pay a 20% penalty plus taxes on withdrawals used for anything other than qualified medical expenses.
Conclusion
It’s never too late to start planning for retirement and HSAs are a tool everyone should consider. Not only will they allow you to save on current taxes, but they will also allow you to stretch the rest of your retirement savings once you are retired.
Steven Neeley, CFP® is an investment advisor representative of and offers investment advisory services through Fortress Capital Advisors LLC, a registered investment advisor offering advisory services in the State of Indiana and other jurisdictions where registered or exempted. Main office: 4841 Industrial Pkwy, #139, Indianapolis, IN, 46226. Tel: (317) 210-3727.
