By Dan Trumbower, CFP®
Accounting for healthcare expenses is essential to a successful retirement strategy. According to Fidelity, the average couple will need $295,000 to pay for healthcare in retirement, and that does not include long-term care, even though about seven in 10 people will need long-term care, such as a home health aide or an assisted living facility, in their lifetime. An LTC policy is expensive and quite frankly, you may never even need to use it. It would be a shame to let all those hard-earned premium payments go to waste.
Health Savings Accounts (HSAs) are a very powerful planning tool that offer triple tax savings for healthcare expenses. What many people don’t realize is that they can act as a “self-insured” long-term care strategy. Contributions are made with pre-tax dollars, earnings grow tax-free and you can withdraw the funds tax-free for qualified medical expenses – either now or in retirement.
What is an HSA?
An HSA is a savings and investment account you may utilize to complement your high-deductible health insurance plan (HDHP). Each year, you decide how much to contribute to your HSA account. The maximum contribution for 2020 is $3,550 for an individual and $7,100 for a family. Those figures will increase to $3,600 and $7,200, respectively, in 2021. For HSA account holders 55 and older, they may make an additional $1,000 “catch-up” contribution. These contributions are 100% tax deductible from gross income.
An HSA can be used for health expenditures such as copayments, deductibles, and services not covered by insurance. This can even include Medicare (Part B and Part D) premiums and health-related improvements to your home, such as a wheelchair ramp. (Consult the IRS documents for allowable expenses.)
Unlike a Flexible Spending Account (i.e., “use it or lose it”), the HSA balance rolls over from year to year. This allows you to create a long-term investment strategy.
How can I maximize an HSA as an investment account?
HSAs can play a valuable role in saving for future healthcare costs - even well into retirement. This is the most tax-advantaged way to save for health care expenses and if your earnings allow, annual contributions to this account should be maxed out.
A good rule of thumb as you begin thinking about how much to contribute: Start with enough to cover your HDHP deductible, expected medication costs, anticipated doctor’s visits and any planned treatments or surgeries. Don’t be afraid to ask your HR representative as you come across questions.
If you are able to afford annual healthcare expenses out of pocket, consider using the HSA as a long-term investment rather than using it to pay for current year expenses. Instead, treat the HSA like a retirement healthcare savings vehicle in the following manner:
1. Contribute the annual maximum to your HSA.
2. Pay for current year expenses out of pocket.
3. Save receipts for all healthcare expenses (you can do this in electronic format).
4. Invest your HSA according to your retirement timeline. This allows you to take advantage of tax-free growth.
Later on in retirement, you can use your HSA to cover expenses in an assisted living facility or for home health care costs. If it turns out that you do not need these services, then you may withdraw money from your HSA to match up with all the medical receipts that you saved throughout the years - essentially reimbursing yourself from an account that has grown and compounded tax-free for possibly many decades. This is a win-win with zero LTC premiums going to waste!
Investing the HSA
If you anticipate using portions of your account for short-term expenses (within the next 1-2 years), those amounts should be earmarked in lower duration fixed income securities – subject to minimum price fluctuations so that funds will be available for when you need them. The portion of your account earmarked for longer-term healthcare expenses, or for your future retirement healthcare expenses, can be more balanced or even growth-oriented allocation. There is no required minimum distribution for HSAs, as there is for traditional IRAs and 401(k) accounts. HSAs have a triple tax advantage, they can be used to fortify your retirement now and for years to come.
As with all investment decisions, the strategy will be dependent on your goals and expectations for the use of the account. Make sure to consult with a fee-only, independent fiduciary wealth advisor for guidance specific to your situation.
About the author: Dan Trumbower, CFP®
Dan Trumbower, CFP® is a Senior Wealth Advisor at Halpern Financial, a fee-only, independent, fiduciary wealth management firm in Rockville, MD and Ashburn, VA.
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