Clients often have no idea how big a price tag health care during retirement will carry, but it is a hefty one.
The latest annual Fidelity Investments report on this topic estimates that a 65-year-old couple will spend a total of $220,000 (in today’s dollars) on out-of-pocket medical expenses during retirement.
One savvy way to come up with the needed funds is to use a health savings account.
“HSAs are terrific savings plans,” says Deborah Juran, senior vice president and financial advisor in RBC Wealth Management’s Monterey, Calif., office.
TRIPLE TAX BREAKS
HSAs are available to those with certain types of high-deductible health insurance plans.
“They offer exceptional tax benefits,” says Jeff Munn, vice president of benefit development policy for Fidelity in Boston.
HSA contributions are tax-deductible. This year, contributions can be as large as $7,650 for HSA holders 55 and older with family coverage, which is higher than the limit for individual retirement accounts.
Munn points out that there is no “use it or lose it” requirement with an HSA.
“You can use today’s contribution to pay for a medical bill you incur 20 years from now,” he says.
Investment earnings inside the account are untaxed, and HSA withdrawals to pay for qualified medical costs also are tax-free.
What if a client saves money in an HSA and finds that it is needed for other retirement expenses?
As Juran points out, HSA withdrawals after 65 will be subject to income tax but not to a penalty if they are used for non-medical costs.
Before 65, using an HSA for non-qualified expenses triggers income tax and a 20% penalty.
According to an August report from Devenir Research in Minneapolis, 87% of HSA assets are in demand deposit accounts, rather than in investment accounts. Thus, many HSA owners keep their money liquid, so that they have easy access to untaxed cash to pay medical expenses not covered by their health plan.
“What we’re seeing is that once people have enough money in their HSA for what they anticipate spending on health care, they want to invest the additional money in the account,” Munn says.
Devenir Research agrees about this trend, estimating that HSA investments will balloon to $8.6 billion in 2017 from $3.2 billion last year, growing to 19% from 13% of the entire HSA pie.
“Advisors who discover that clients have substantial amounts in an HSA, mostly in deposits, might suggest a review of other choices,” Munn says.
A variety of HSA investment options, often including mutual funds, may be offered to account holders.
Donald Jay Korn is a New York-based financial writer who contributes to On Wall Street and Financial Planning.
This story is part of a 30-day series on retirement planning strategies.