According to research by Fidelity Investments, a 65-year-old couple can expect to spend about $315,000 on medical costs in retirement. This can sabotage even the best laid plans. How can you prepare? One way is by using a Health Savings Account (or “HSA”).
Especially if you are healthy and don’t go to the doctor much, these unique tools can turbocharge your retirement savings. That is if you use it right. Here’s how:
1. If you’re eligible, set up a health savings plan. You do that by purchasing HSA-compatible insurance (or health-sharing policy). Then you’ll also set up a separate HSA account.
2. You can contribute a set amount each year into your HSA account pre-tax, so it lowers your taxable income. That means upfront tax savings.
3. The money is yours, and there’s no expiration each year, as with an FSA (flexible spending ) account.
4. The best part is you can invest the HSA and the account grows tax-free, just like a Roth IRA. All withdrawals for medically-related expenses for you, your spouse, and any dependents are tax-free.
If you can pay out of pocket for any current year’s medical expenses, you can treat this like a retirement account. You can reimburse yourself anytime in the future, but in the meantime you can invest this money, tax-free.
The HSA covers a broad range of costs such as prescription glasses, acupuncture, chiropractic, dental procedures and even counseling. Once you are retired, you can also pay health insurance premiums, long-term care and Medicare supplements with your HSA.
What if you need the money for an emergency? You can reimburse yourself anytime for health care costs you paid out of pocket with no penalty.
It’s rare to get such significant tax benefits without income limitations. Just be sure to follow all regulations and track your receipts.