June 17, 2019

Everyone knows as we age our healthcare costs will increase. Many seniors struggle to keep up with the increasing cost of healthcare while their incomes are static or even decreasing. Once you reach age 65 the overwhelming majority of your healthcare costs are paid by Medicare and private insurance but there are still Medicare insurance premiums, supplemental insurance premiums, deductibles and other out of pocket costs to pay. By some estimates these can cost a healthy 65 year old couple around $245,000 or more over the course of their retirement and this does not include any long term care costs you might have.  We need to start thinking about healthcare as a separate major expense that we need to pay for in retirement and there is a way to do it.

One of the most underused retirement savings vehicles is the Health Savings Account or HSA. Much like a traditional IRA any money you contribute to an HSA is tax deductible and you do not pay any taxes on earnings in the account as long as they are used for qualified healthcare expenses. The HSA can only be used if you have a high deductible health care plan (HDHP).  These plans are becoming more popular for individuals and employers as a way to control the high cost of health insurance premiums. But to meet the definition of a HDHP the maximum out of pocket costs including co-payments and deductibles for a family is $13,500 and $6,750 for an individual. The current annual contribution limits to an HSA are $7,000 for a family and $3,500 for an individual with an additional catch-up contribution of $1,000 for those over age 55. Once you are eligible for Medicare you cannot fund an HSA.

Many people have an FSA or flexible spending account through their employer. With these accounts the money must be used every year or you lose it. Not so with an HSA. Once you have established an HSA you can keep your contributions and earnings in the account until you use it. The contributions are either contributed pre tax if through an employer or are tax deductible if you buy health insurance yourself.

This opens up the opportunity for you to invest the money for your healthcare needs in retirement. If you start when you are younger odds are you are not going to use all of the money you invest in the HSA for healthcare. Some people even contribute the maximum to an HSA but pay all of their current healthcare costs out of pocket. If invested wisely the HSA will become a nice pool of money to use for healthcare after you retire. Some employers even help fund an HSA if they have a high deductible health insurance plan.

Yet many people who have high deductible healthcare plans do not have an HSA. And many of those who have an HSA don’t invest the money. They just leave it in low yield or no yield HSA accounts. HSA accounts are offered by hundreds of providers. All providers are banks and credit unions. Some are better than others. And just like any investment, you want an HSA that offers a good variety of investment choices that perform well and are not too expensive. This involves some work researching fees and performance. Many providers know people won’t do their homework and will just use the most convenient option available so they jack up the fees and their investment choices are not very good. Go to www.hsasearch.com to see a list of providers and compare the features of each account.