It's no secret that healthcare is a major burden for seniors. In fact, 79% of future retirees aged 50 and over cite healthcare costs as their top retirement concern, according to new data from Nationwide. Yet that same survey shows that 55% of older workers who have the option to fund a health savings account, or HSA, don't contribute to one.
If you're eligible to participate in an HSA, doing so could be your ticket to more manageable healthcare costs during your golden years. And if you don't take advantage of this key savings opportunity, you'll likely regret it down the line.
How HSAs work
Many people tend to confuse HSAs with flexible spending accounts, or FSAs, even though the two are very different. While both plans are designed to help you pay for healthcare expenses in a tax-advantaged manner, with an FSA, you're required to use up your plan balance year after year or risk forfeiting it, and you can't invest the funds you're not using.
An HSA, on the other hand, is more of a long-term savings and investment account. The money you put into an HSA does not have to be used up on a yearly basis. In fact, the best way to benefit from an HSA is to contribute more money than you expect to use in the near term, invest your balance, and let it grow into a larger sum so that it's available to you later in life -- namely, during retirement.
Like FSAs, HSA contributions go in on a pre-tax basis. Currently, you can contribute up to $3,500 to an HSA as an individual or up to $7,000 as a family. If you're 55 or older, you get to contribute an extra $1,000 on top of whichever limit you qualify for. Furthermore, some employers fund HSAs on their employees' behalf, much like they offer matching contributions for 401(k) plans.
Not only can you save money on income taxes by funding an HSA, but once you invest in one of these accounts, you're not liable for taxes on associated investment gains provided you take withdrawals for qualified medical purposes. These include expenses like doctor visit copays, prescriptions, and durable medical equipment. Furthermore, your withdrawals themselves are also tax-free -- provided, once again, that they're used for healthcare expenses only.
Not everyone can fund an HSA. To qualify, you must be on a high-deductible health insurance plan, which means a deductible of $1,350 or more for individual coverage or $2,700 or more for family coverage. You also must have an annual out-of-pocket maximum of $6,750 as an individual or $13,500 as a family. If you're already receiving Medicare benefits, you're barred from making HSA contributions as well -- even if you're still working.
If you are eligible to fund an HSA, passing up that opportunity is a big mistake. That's because HSAs offer more tax benefits than popular retirement savings plans like IRAs and 401(k)s. With a traditional IRA or 401(k), your contributions go in tax-free, and your investment gains in your account are tax-deferred (which means they are delayed but not tax-free), with withdrawals being taxed. HSAs, by contrast, provide a triple tax advantage when used for their intended purpose -- your contributions are tax-free and you avoid taxes on both investment gains and withdrawals.
Chances are, healthcare will be one of your most substantial expenses once you retire. By contributing to an HSA during your working years, you'll have a dedicated set of funds on hand to cover your medical costs once your paycheck disappears. And that's a good way to buy yourself some peace of mind for the future.