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Too Many Workers Are Missing Out on This Key Retirement Savings Tool

By Maurie Backman - Jun 28, 2021 at 4:36AM

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Are you making the same mistake?

Many people assume that their living costs will go down in retirement. But if there's one expense that's more likely than not to climb, it's healthcare.

Fidelity estimates that the average 65-year-old male-female couple leaving the workforce this year can expect to spend a whopping $300,000 on healthcare throughout retirement. And while you may enter your senior years with a nice amount of money in your IRA or 401(k) plan, you may also find that medical bills eat up an uncomfortable chunk of it.

Fortunately, there's another cost-effective way to save for your future healthcare expenses -- a health savings account, or HSA. Though not everyone is qualified to participate in an HSA, since eligibility hinges on being enrolled in a high-deductible insurance plan, many people can exercise this savings option.

Doctor with stethoscope standing behind seated coughing patient.

Image source: Getty Images.

But in a recent Charles Schwab survey, 79% of employees are offered an HSA by their employers, yet only 49% use that account. And that's a big mistake.

The upside of HSAs

Many people like saving in IRAs and 401(k)s for the tax benefits involved. But HSA offer even more tax savings.

HSA contributions are made with pre-tax dollars, and any funds that aren't needed immediately can be invested for added growth. Gains an in HSA can be enjoyed tax-free, as can withdrawals, provided they're taken for qualified medical expenses.

Also, to be clear, HSA funds never expire. Some workers confuse them with flexible spending accounts, or FSAs, which need to be used up year after year to avoid forfeiting money. But HSAs have completely different rules.

Annual HSA contribution limits

Like IRAs and 401(k)s, HSAs come with their own yearly contribution limits. For the current year, those limits are:

  • $3,600 for workers under 55 saving on their own behalf
  • $4,600 for workers 55 and over saving on their own behalf
  • $7,200 for workers under 55 saving on behalf of a family
  • $8,200 for workers 55 and over saving on behalf of a family

Come 2022, these limits will rise by $50 for self-only coverage and $100 for family coverage. As such, here's what next year's limits will look like:

  • $3,650 for workers under 55 saving on their own behalf
  • $4,650 for workers 55 and over saving on their own behalf
  • $7,300 for workers under 55 saving on behalf of a family
  • $8,300 for workers 55 and over saving on behalf of a family

It pays to save in an HSA

Many people assume that once they enroll in Medicare, their health-related expenses will go down. In reality, a lot of people wind up spending more money as Medicare enrollees between premium costs, deductibles, copays, and the fact that more health issues tend to arise as part of the aging process.

If you want to avoid a financial crunch later in life, then it pays to see if you're eligible to contribute money to an HSA and do your best to max out year after year. That way, you'll get the peace of mind that comes with knowing that one major retirement expense is taken care of.

Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Maurie Backman has no position in any of the stocks mentioned. The Motley Fool recommends Charles Schwab. The Motley Fool has a disclosure policy.

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