As this year comes to a close, it is time to review and take stock of where you are financially. Make sure you have fully funded your retirement accounts for this year and get set up to properly fund them in 2021.
An often-overlooked retirement strategy is the Health Savings Account or HSA. The key to the HSA is that the balance can be carried forward year after year when it is not used for current medical expenses. In retirement, your HSA becomes an additional retirement account – a healthcare retirement account, if you will. It can be used in retirement to pay out-of-pocket healthcare costs, including prescriptions, as well as insurance premiums and long-term care expenses.
HSA is Triple Tax Free
- You receive a current income tax deduction for the contribution, and when it is payroll deducted, the contribution is not subject to payroll taxes (FICA and Medicare), either.
- The growth and interest on the account is not taxed.
- When you take money out to pay qualified medical expenses it is Tax Free!
It really is a Win Win Win.
The contribution levels are low, but when left to accumulate, overtime they add up. Your 2020 limit is $3,550 for an individual plan and $7,100 for a family. If you have a high deductible health insurance plan (at least $1,400 for an individual and $2,800 for a family), you qualify to open an HSA. Make sure your account is fully funded in 2020. You do have until you file your tax return to fund it each year.
According to SHRM in a November 3, 2020 article, 1 in 3 adults who are now enrolled in a High Deductible Health Plan have not opened an HSA. Further, most people with an HSA have not funded it in the past year. This must be a failure to communicate and educate on the part of financial advisors and human resources departments. HSAs offer an opportunity too good to pass up.
Retirees need to Plan for Future Healthcare Costs
According to the Fidelity Retiree Health Care Cost Estimate, referenced in the SHRM article, an average retired couple age 65 in 2020 may need $295,000 saved after tax to cover health care expenses in retirement. Retirees need to plan for healthcare expenses.
Once you enroll in Medicare you are no longer eligible to fund your Health Savings Account so it is important to start early and fund it regularly to build a retirement healthcare account.
Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our views at the time of this writing, and it is subject to change. It is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us.