When the time for retirement comes, we must be prepared to cover our everyday expenses but without the same income as we used to have. One of the biggest challenges that we face during retirement is covering our health care expenses. According to the Center for Retirement Research, the average retiree spends around $4,000 a year on health care costs. Besides, one in five retirees ends up spending half of their Social Security income on health care expenses, too. However, thanks to Health Savings Accounts, or HSAs, we can prepare to cover medical expenses when we retire while we lower our tax bill at the same time. Here’s how an HSA works.
To begin with, we need to understand what exactly an HSA is, how it works, and how we can benefit from one in order to decide whether we should open one or not. A Health Savings Account is basically a retirement fund account that is designed to help you cover healthcare expenses. Just like the traditional IRA and 401(k) accounts, contributions made to an HSA are tax deductible. Yet, one of the most convenient characteristics of HSA accounts is that the withdrawals we make that go toward medical expenses are tax deductible too.
There are some requirements we need to meet first in order to be eligible for a Health Savings Account, and we should be aware of them, too. For example, we cannot open an HSA unless we are enrolled in a high-deductible healthcare plan. This means that, as of 2019, we need a deductible of at least $1,350 for individuals and $2,700 for families.
Also, we need a maximum out-of-pocket limit of $6,750 for individuals or $13,500 for families. In addition, HSAs come with a yearly contribution limit; $3,500 for individuals or $7,000 for families. Keep in mind that you can contribute an additional $1,000 per year as long as you are age 55 or older.
As we mentioned above, one of the advantages that come from having a Health Savings Account is that, whenever we use the funds to cover medical expenses, such costs can be tax deductible, just as our contributions. Since the vast majority of retirees will need to cover health care expenses at some point during retirement, it makes sense to have separate savings account specifically for those expenses. Yet, it is important to mention that we are not obliged to use these savings on health care only. However, if we use our withdrawals for another purpose, such withdrawals might be subject to income tax, and we would have to cover a 20% penalty fee.
Therefore, we need to carefully consider whether an HSA would be the best option for us and take it from there. If we think this kind of retirement account will outweigh the benefits of a traditional IRA or 401(k), we should open one and start saving as soon as possible. But if we are not sure this is the best way to go, maybe a Health Savings Account isn’t the right choice for us.