Think you’re fully covered for health care costs in retirement? Think again. According to Fidelity, the average retired couple will spend nearly $260,000 on out-of-pocket health care costs.1 Those costs are for things like deductibles, copays, prescription drugs, premiums and much more. It doesn’t include costs for long-term care, which could significantly increase your health care expenses.
Many retirees assume that Medicare will cover all their medical costs. That assumption is often incorrect. While Medicare is a valuable resource, it usually covers only a portion of your expenses. Some types of care may not be covered at all. That means many retirees face sizable bills that they must pay out of pocket.
A health care funding strategy can help you prepare for these costs and prevent them from derailing your retirement. You may want to consider a health savings account (HSA) as one component of your plan.
As their name implies, HSAs are accounts established specifically for health care saving purposes. You can contribute to your HSA straight from your paycheck and then manage the funds as you see fit. When you have health care costs, you can simply use your HSA to pay the bill or to reimburse yourself for the expense.
Still not sold on using an HSA as part of your retirement strategy? Below are a few reasons why an HSA could be an important funding tool for you:
HSAs offer tax efficiency in a variety of ways. First, your contributions to your HSA may be deductible, depending on your income and the amount of the contribution. Your contributions then grow on a tax-deferred basis while they stay in the plan.
When you take distributions from the plan, those distributions are tax-free as long as the money is used for a qualifying medical expense. If the money is used for a nonqualified expense, you could face taxes and early distribution penalties if you’re under age 59½. As long as you use the money for health care, however, your HSA can be a highly tax-efficient savings vehicle for medical expenses.
Many people assume that an HSA has a “use it or lose it” feature. That is, they assume they must use their HSA money within a specific calendar year. The truth is that your HSA balance can carry over from year to year. There’s no need to use it before the end of the year. That means your HSA funds could grow over an extended period of time.
Also, your HSA balance isn’t tied to your job. Although your contributions may come out of your paycheck, you keep your balance with you when you leave your employer. You can keep contributing to your HSA at each job you have and even after you retire.
Finally, while HSA funds must be used to pay for medical expenses, the IRS actually has a very broad definition of what constitutes a qualified expense. Nearly any payment to a medical services provider, such as a doctor or hospital, qualifies. Copays for prescriptions and other services qualify. Even payments for medical supplies can qualify as a medical expense.
You could also use your HSA to pay for long-term care costs. For instance, you may need to pay a home health aide to come to your house and assist with basic tasks. Or you may need to modify your home to accommodate a wheelchair. You could use your HSA funds to pay those costs.
Ready to develop your retirement health care funding strategy? Let’s talk about it. Contact us today at Thomas Financial Corp. We can help you analyze your needs and create a plan. Let’s connect soon and start the conversation.
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