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July 31, 2017 at 12:00 AM
For today’s retirees, rising health care costs are a fact of life. The average 65-year-old couple is facing a lifetime total of over a quarter of a million dollars’ worth of premiums, prescription drugs and medical bills. There has never been a more critical time to save.
While 401(k)s, IRAs and annuities have plenty to offer, pre-retirees and middle-aged workers would be wise to consider health savings accounts. Underutilized but eminently useful, the HSA is a triple tax-advantaged way to provide for inevitable health care costs in retirement.
The Trade-Off: High-Deductible Health Coverage
With an HSA, contributions, growth and withdrawals for qualified medical expenses are all tax-free. Unlike 401(k)s and IRAs, HSAs also allow investors to withdraw at any time, again, provided that the funds are used to cover health care costs. Funds roll over year to year, the money can be moved between health plans or employers and relatives and other parties can contribute to the same account. Most HSAs even issue checks and debit cards, making it easy to pay for medications and other expenses at the point of sale.
What’s the catch?
“Investors have to have qualifying high-deductible health plans [to use HSAs],” said Richard Stone, Accredited Investment Fiduciary with The Lifetime Companies. “Almost everyone would open one if they could, but not everyone is eligible.”
For 2017, the minimum annual deductible for these HSA-accompanying plans is $1,300 for individuals and $2,600 for families. And while HDHPs are becoming more popular, many employers still offer the traditional higher-premium, lower deductible plans to which consumers have become accustomed.
“We serve about 220 employers, and probably 60 to 70 percent of them offer HSA plans,” added Stone.
For some savers, the cost differential isn’t worth a high deductible, either. Consider an employer who offers a choice between a traditional HMO with no deductible and an HSA-qualified plan with a $2,000 deductible. If the former plan featured a $200-per-month premium and the latter a $150 premium, an employee would essentially save $600 in exchange for a $2,000 risk. HSA plans allow employees to put away more, of course. But depending on their cash flow and priorities, the long-term savings may not be worth the short-term risks and opportunity costs.
What’s covered
Publication 969 lists HSA-qualified medical expenses, which include almost every health care-related cost a retiree might pay. Medical, dental and vision expenses are fair game, making it easier to fill the gaps left by Medicare Part B. Bills from chiropractors, physical therapists and other non-physician health care professionals also qualify – a welcome change for clients who’ve dealt with reimbursement runarounds. All prescription drugs qualify, as well, as do over-the-counter medications, with a doctor’s recommendation.
HSAs cannot, in general, be used to pay for health insurance; exceptions to this rule, however, get retirees off the hook. Long term care insurance and COBRA coverage qualify, as do Medicare Parts, A, B, D and Advantage premiums. And, once an employed investor turns 65, they can use their HSA to pay for their employer-sponsored health insurance. Medigap is not covered.
Limits, penalties and flexible growth
As of 2017, annual HSA contribution limits are $3,400 for individuals and $6,750 for families, and investors 55 and older can contribute an extra $1,000. While those limits pale in comparison with the 401(k) maximum contribution of $18,000, HSA dollars can grow at competitive same rates (not to mention tax-free).
“Most HSA plans have stock, bond and mutual fund investment options,” says Stone. “Some banks require you to stay in a money market up to a threshold, but once you exceed that, they let you set up a brokerage account within the HSA and invest it wherever you want, just like a 401(k).”
