Health Savings Accounts - The Underutilized Retirement Strategy
The average couple retiring today will spend $280K on health care expenses during retirement (Fidelity)
Individuals are paying higher premiums and deductibles for health coverage today
Health Saving Accounts (HSA), can be one of the best ways to save and plan for health care expenses
HSA accounts have a ‘triple tax benefit’
It’s open enrollment time for those who have health benefits. This is a time where we must decide the type of health coverage that suits us best for the upcoming year. Depending upon what you decide, you will be able to participate in a tax advantaged solution that will serve you well for health care expenses now or in the future. Health savings accounts, or HSA, are one of the most underutilized savings vehicles for retirement. They were created in 2003 so that individuals that are covered by high deductible health plans could save for medical expenses. The savings that go into them can be used for medical expenses at any time, now or in the future. These HSA accounts receive tax preferred treatment of funds, similar to 401k’s and IRA’s. In some cases, depending on taxes and immediate health care usage, HSA accounts can be much more powerful than these other retirement plans. This is because you get an immediate tax deduction for funds contributed, the funds grow tax free and are withdrawn tax free if used for qualified medical expenses.
Let’s face it, health care is one of the single largest expenses we will face in retirement and a concern for all of us. A couple retiring today will need an estimated $280K to cover health care costs in retirement. (source: Fidelity) Those figures do not include expenses such as over the counter medications, most dental services, and long-term care. The costs will be even greater for those retiring before age 65 due to cost of insurance coverage needed prior to Medicare eligibility. And to make matters worse, we are living much longer due to medical advances, this will not change. Planning for health care expenses in the future should start now and be a part of every financial plan.
Most of us have health care coverage through an employer or through a private plan we purchased from an insurer. Rising health care prices are forcing employers and insurers to pass along more of the health insurance costs to us in the form of higher premiums and deductibles. Our premiums and out of pockets expenses are rising at unprecedented rates. Employees can expect to have deductibles between $1K-$2K, while family plans may have a deductible around $3,500. According to a study from Mercer (see chart), average PPO deductibles have risen 72% from 2009-2017. In 2001 health care costs accounted for 12% of income for a family of four, today it accounts for 30% of family income (Center for American Progress). These costs are unsustainable for families that are also trying to save for retirement, college, and buy homes.
As I mentioned, HSA accounts can help us prepare for health care costs, now or in the future. To illustrate, let’s go over how HSA plans work. Of course, you must meet certain criteria to qualify to start an HSA account.
You must meet the following:
Be covered under a high deductible health plan (HDHP)
Your HDHP has a minimum annual deductible for the plan in 2018 of at least $1,350 for self and $2,700 for family coverage
Your HDHP does not exceed the maximum out of pocket threshold for 2018 of $6,650 for self and $13,300 for family coverage (in network)
You must not be covered by any other health plan, including spouse
Must not be covered by you or your spouse’s flexible spending account (FSA)
Not be enrolled in Medicare
Not be claimed as a dependent on another person’s tax return
Here are benefits and features of Health Savings Accounts:
Triple tax benefit
Immediate tax deduction
Earnings grow tax free
Funds withdrawn tax free for qualified medical expenses
Contribution limits for 2018 are $3,450 individual and $6,900 family
Contribution limits for 2019 are $3,500 individual and $7,000 family
Expenses paid can be from any time, current or the past
To see how this adds up over time, as an example, if a 35-year-old couple contributed $6K per year, growing at 7%, to a health savings account for 30 years they would accumulate over $560K. You can see in the chart they added $180K while the growth was over $380K. Remember, these assets are withdrawn tax free for qualified health care expenses.
So, when does choosing an HSA qualified health plan and contributing to an HSA make sense? You must be able to afford higher insurance premiums today and pay for potentially higher out of pocket costs for unexpected medical needs. Your health situation and benefits usage can help decide which plan makes sense. As an example, if you are only going to the doctor for annual checkups (usually covered by HDHP plans) it may make sense to choose an HSA plan. If you are expected to have higher upcoming medical expenses you may want to choose a plan that provides more coverage than a HDHP plan. Remember, this is a year to year decision.
You can use your HSA funds immediately or anytime in the future. In fact, you may even use todays medical expenses and get reimbursed in the future after funds have grown. This is called the ‘shoebox’ strategy. Simply, pay for medical expenses out of pocket today, store and archive your receipts, invest funds long term, then cash in tax free later. See video below. This is a great way to help provide tax free income in retirement to allow other tax deferred accounts, such as 401k’s, to grow longer.
There are very few ways to get this type of tax benefit immediately and over time, Health Savings Accounts are one of them. If interested, you should check with your benefits department or health insurance provider to see if you qualify. We’d be happy to discuss further how the Health Savings Account works and if they make sense for you. We can assist with getting one started should you qualify.
This commentary on this website reflects the personal opinions, viewpoints, and analyses of the Hamilton Wealth, LLC employees providing such comments and should not be regarded as a description of advisory services provided by Hamilton Wealth, LLC or performance returns of any Hamilton Wealth, LLC investment client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Hamilton Wealth, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.