Ask the average senior what the most stressful aspect of retirement is, and chances are the answer will boil down to healthcare. According to Fidelity's latest estimates, a 65-year-old couple retiring this year can expect to spend $285,000 on medical expenses throughout retirement, and there are other reports out there that project even higher numbers.
If you're worried about paying for healthcare in retirement, a health savings account, or HSA, could be the ideal solution. An HSA is a tax-advantaged savings/investment account designed to help workers save for medical expenses. To qualify, you must have a high-deductible health insurance plan, defined as an annual out-of-pocket deductible of $1,350 for single coverage, or $2,700 for family coverage. From there, you can contribute up to $3,500 for individual coverage and $7,000 for family coverage this year, keeping in mind that these limits can change from year to year. If you're 55 or older, you can also make an additional $1,000 catch-up contribution.
If you've been on the fence about opening an HSA, it pays to read up on the benefits these accounts offer. Here are a few you should be aware of.
1. HSAs are triple-tax-free
You're probably aware that when you fund a traditional IRA or 401(k), that money goes in on a pre-tax basis. Your money then gets to grow tax-deferred so that you're not paying taxes on investment gains year after year, but once you take withdrawals in retirement, you're subject to taxes. HSAs, on the other hand, are triple-tax-free: Contributions go in tax-free, your money grows tax-free, and withdrawals are taken tax-free provided they're used to cover qualified medical expenses. How's that for savings?
2. HSAs don't have required minimum distributions
The money you save in a traditional IRA or any type of 401(k) can't just sit there indefinitely. Once you turn 70-1/2, you'll need to start taking mandatory withdrawals annually known as required minimum distributions, or RMDs. In doing so, you lose out on the tax-advantaged growth you were previously getting on that money. HSAs, however, don't impose RMDs, so if you don't have a need for your money every year in retirement, you can leave your balance alone to grow for larger expenses that might loom.
3. HSAs can be funded by employers, too
Many employers who sponsor 401(k) plans also match employee contributions to varying degrees. Thankfully, this benefit exists for HSAs as well. If your company is so inclined, it can contribute money to your account (though employer contributions do count toward the annual limit).
4. HSAs don't need to be used up from year to year
Many people confuse HSAs with FSAs, or flexible spending accounts, when in reality, the two have very different rules. With an FSA, you're setting money aside on a pre-tax basis to cover medical costs for the upcoming year, and you generally can't roll unused funds over once your plan year expires. HSAs, on the other hand, don't have to be used up on a yearly basis. In fact, the whole point of an HSA is to invest your money so that once retirement rolls around, you'll be sitting on a hefty balance to tap.
5. There are no income limits associated with HSAs
Though the tax system is often said to favor the rich, higher earners are often barred from capitalizing on certain tax breaks. For example, many tax credits phase out for higher earners, and those with substantial incomes are also prohibited from funding Roth IRAs. The good thing about HSAs is that there are no income limits to worry about. As long as you stick to the annual contribution limits, you're free to participate in an HSA regardless of how much money you make.
If you're worried about affording healthcare in retirement, start looking into a health savings account. Not only are these accounts fairly flexible, but they offer a world of tax savings it pays to take advantage of.