Thinking about the amount of savings needed for a financially secure retirement can be overwhelming when you think about the unknowns. Unknown global markets and volatility could erode retirement accounts. Questions surrounding our future standard of living with no further job-related earnings coming in. And for most, unknown concerns about potential health issues.
When we look at projected healthcare costs for an average retired couple in 2022, the amount needed to cover healthcare expenses approaches approximately $315,000 after tax. In other words, it could cost over a quarter of a million dollars of our retirement funds to cover out-of-pocket healthcare expenses. It could cost more than the projected amount if all retirement funds are in a pre-tax account. Every dollar withdrawn is taxed at your federal and state marginal rates in the distribution year.
But there is a way to save for these future healthcare costs while enjoying a triple tax-free benefit. A retirement savings vehicle, known as a Health Savings Account (HSA), can provide for retirement healthcare expenses better than a 401(k) or individual retirement arrangement (IRA).
What Is A Health Savings Account?
An HSA is a type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses, according to the U.S. Centers for Medicare and Medicaid Services. It’s designed to help people with high-deductible insurance plans pay their out-of-pocket medical costs, but can also be surprisingly effective as a retirement savings tool. By using untaxed dollars to pay for deductibles, copayments, coinsurance and other expenses, you may be able to lower your overall healthcare costs.
The balance in HSAs varies based on the age of account holders. According to the Employee Benefit Research Institute (EBRI), the following table shows the age of account holders and their average HSA balance at the end of 2020:
| Age Group | Average Balance |
| Less Than 25 | $876 |
| 25-34 | $1,899 |
| 35-44 | $3,154 |
| 45-54 | $4,064 |
| 55-64 | $6,082 |
| 64 or Older | $6,884 |
What are the Benefits of A Health Savings Account?
Receive a current-year tax deduction with contributions
You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even without itemized deductions, according to the IRS.
The growth within an HSA isn’t taxed
All interest earned along with investment gains in your HSA is 100% tax-deferred, meaning the funds can grow without being subject to taxes unless used for non-eligible medical expenses.
Tax-free distribution when HSA funds are used for retirement healthcare expenses
When you withdraw funds from a traditional 401(k) or IRA, you must pay income tax, regardless of how the funds are being used. That isn’t the case with an HSA. You can even use the money you save for non-medical expenses after age 65 without any penalties. But, it’s important to note that ordinary income rates on non-qualified withdrawals will apply just as with a traditional IRA or 401(k).
Most contributing to a company-sponsored HSA save the 7.65% FICA taxes
The current FICA tax rate for employers and employees is 7.65% each. Employers are responsible for matching their employees’ FICA tax liabilities based on their gross taxable wages — the total FICA tax is 15.3%. By setting up an HSA program, the pretax payroll deductions reduce the income applicable to FICA taxes on the employee side. Therefore, employers save 7.65% on any pretax employee contributions to their HSA program.
HSA monies aren’t required to be withdrawn in the same year as the underlying healthcare expense
Some people have paid for current healthcare expenses with after-tax funds while keeping these receipts for decades. Down the road, they withdraw these amounts from their HSAs tax-free to spend as they please.
You can roll over HSA funds from year to year
The IRS lets you roll over HSA funds every 12 months and keep the tax-free status if you discover an HSA plan with better fees or investment options. After requesting a rollover, your current HSA provider will send the money via bank transfer or mailed check. Technically, you have 60 days from when you receive the funds to deposit them into the new account. If the deadline isn’t met, the money counts as a taxable contribution and is subject to a 20% penalty.
An HSA isn’t tied to an employer
Unlike flexible spending accounts (FSAs), which require an employer’s sponsorship, HSAs are available to everyone, regardless of employment status. Your HSA sticks with you through the transition, like starting a new job, launching a business, unemployment or any other career changes.
Most HSA plans now offer a wide range of investment options
Some plans allow you to invest your HSA money into stocks, bonds, mutual funds, exchange-traded funds (EFTs) and fractional shares. By investing a portion, you can potentially grow your funds tax-free.
Children of parents with HSAs can qualify for their own account
If a child is enrolled under their parent’s high-deductible plan and not claimed as a dependent on the parent’s income tax return, they can contribute the family amount of $7,750 into their own HSA in 2023. It can also be funded with their earnings or someone else’s money.
What Are the Contribution Stipulations?
For 2023, the maximum contributions to an HSA are $7,750 for a family or $3,850 for an individual. An additional catch-up provision of $1,000 is available for those over the age of 55. For a High Deductible Health Plan (HDHP), current law limits the maximum out-of-pocket expenses to $15,000 for a family and $7,500 for an individual. The HDHP is paired with a tax-favored HSA account. The employer or plan participant can contribute pre-tax dollars into this account to pay for out-of-pocket health expenses.
Check out our retirement planning playlist for tips on receiving the most from your benefits.
What Can You Use HSA Savings For In Retirement?
While you can’t pay premiums for health insurance coverage using HSA funds, the funds can pay for qualified medical expenses such as deductibles, copay and coinsurance:
- IRS-qualified health care premiums for Medicare Parts B, C, and D
- Medicare deductibles, co-pays, and co-insurance
- Qualified long-term care insurance premiums
- Dental and vision expenses
- Hearing aids
- Insulin and diabetic supplies
- Over-the-counter medicine and medical equipment and supplies
Items to Consider When Electing an HSA
HSA dollars aren’t shielded from creditors in all states
In the rare incident where a successful lawsuit results in an award higher than policy limits, the HSA could be subject to the settlement.
Plan to spend your HSA before death
When you die — or you and your spouse if married — the HSA becomes fully taxable to your named beneficiary or estate. Unlike an IRA, there isn’t a “stretch” provision.
Work With a Fortune Financial Advisor
HSAs exceeded $100 billion by the end of January 2022 and is forecasted to hit $150 billion by the end of 2024. As these accounts continue to grow, it’s important to seek professional assistance for managing these funds. An advisor can provide an analysis and build a retirement strategy custom to your needs. They consider variables such as account fees, investment options and minimum balance requirements to determine if an HSA is the best choice for you. Our advisors examine other factors such as family longevity history, outside assets available to fund retirement and income level to determine how to allocate those funds for future healthcare costs.
Every client we work with is at a different stage in life with varied priorities and deployable resources to use to achieve their financial goals. This is where our talent, real-world experience, depth of knowledge and ability to simplify the complex for our clients come into play. Our robust and interactive financial planning software can handle almost any financial issue. Changes and modifications to your assumptions can be instantly viewed and discussed, resulting in more timely adjustments before they become major challenges. To experience the Fortune Financial difference, contact an advisor and harness our expertise to determine options best tailored to your retirement needs.
Important Note
This material is provided for educational purposes only and does not constitute investment advice. The information contained herein is based on current tax laws, which may change in the future. Fortune Financial Advisors cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. The information provided in these materials does not constitute any legal, tax or accounting advice. Please consult with a qualified professional for this type of advice. The information provided above is obtained from publicly available sources and is reliable. However, no representation or warranty is made as to its accuracy or completeness.
