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Older Americans Are Missing Out on This Valuable Retirement Savings Plan

By Maurie Backman – Sep 20, 2021 at 5:18AM

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Are you missing out, too?

Many seniors find that once retirement kicks in, healthcare becomes their greatest monthly expense, surpassing even housing. The good news is that people who sock money away in a health savings account, or HSA, can access tax-free funds to cover medical care during retirement. The bad news, however, is that more than half of older Americans aren't taking advantage of the opportunity to fund an HSA.

Don't pass up a host of tax breaks

What makes HSAs so valuable is their tax-advantaged nature. Many people are used to the tax benefits offered by retirement plans like 401(k)s. Well, HSAs allow for tax-free contributions, and any funds that aren't used immediately can be invested so they grow into a larger sum. Investment gains in an HSA aren't taxed, and withdrawals are tax-free provided they're used to pay for qualified healthcare expenses.

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Now there is one catch with HSAs -- to qualify, you must be enrolled in a high-deductible health insurance plan, the definition of which changes from year to year. But in a recent survey, among adults aged 50 to 80 who were enrolled in a high-deductible insurance plan, only 45% had an HSA, according to the National Poll on Healthy Aging. That means that more than half of older Americans are missing out on a key savings opportunity.

HSAs weren't necessarily designed as a retirement savings tool. But they can easily double as one.

The reason? HSA funds never expire, so you can save during your 30s for healthcare expenses and withdraw that money during your 80s.

Additionally, there are penalties for taking HSA withdrawals for nonmedical reasons, just as there are penalties for taking IRA or 401(k) withdrawals prior to reaching age 59 1/2. But once you turn 65, you can remove funds from an HSA for any reason and avoid being penalized.

In that case, the worst that will happen is that you'll be taxed on the money you remove. But since taxes apply to traditional IRA and 401(k) withdrawals, you're in no worse a situation with your HSA.

You might really need the money

Fidelity Investments estimates that the average 65-year-old male retiree leaving the workforce this year will spend $143,000 on healthcare expenses throughout retirement. For the average 65-year-old female retiree, that total rises to $157,000, accounting for the fact that women typically outlive men.

If you want to have an easier time paying for senior medical costs, be sure to sign up for an HSA if you're eligible for one. Not only that, but make sure to contribute more money to that account than you expect to need for near-term healthcare expenses. That way, you can take advantage of tax-free gains in your account.

Many people sign up for an HSA through their employers. But if the company you work for doesn't offer one, you can sign up independently. And the sooner you start funding an HSA, the more opportunity you'll have to amass a nice chunk of money so that medical care is a less of financial strain once retirement rolls around.

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