According to Fidelity, the average recently retired couple (age 65) may need approximately $315,000 to cover healthcare expenses in retirement—and that’s after-tax money!

Even more daunting? The Centers for Medicare & Medicaid Services (CMS) projects that healthcare prices will climb an average of 5.4% per year through 2031—with this number likely to grow even higher for those several years away from retirement.

Fortunately, proper planning can help ensure healthcare expenses won’t derail your retirement plans. One tool to help you accomplish this is a health savings account (HSA).

What is a health savings account (HSA)?

You can use a health savings account to pay for qualified out-of-pocket healthcare costs including deductibles and copays. Eligible expenses include anything from Medicare premiums and long-term care costs to dental and vision expenses for yourself, your spouse, or eligible dependents.

HSA qualification requirements

Not everyone can open an HSA, as you must meet specific qualification requirements to do so. For example, you must be enrolled in an HSA-eligible health plan and have no other health insurance; this means that as of 2024, your health plan has a minimum annual deductible threshold of $1,600 for individuals ($3,200 for families) with out-of-pocket maximums (excluding premiums) not exceeding $8,050 for single coverage or $16,100 for family coverage.

Additional prerequisites include that you must be at least 18 years of age and cannot be enrolled in Medicare (Part A or Part B) or Medicaid, nor can you be claimed as a dependent on someone else’s tax return. Click here to review all HSA qualification requirements on the IRS website.

How a health savings account works

You can open an HSA account at any bank, credit union, or insurance company that offers one—or directly through your employer if the company offers this.

Those who move ahead with the latter option can make pre-tax contributions via payroll deductions (just like a 401k); if you live in New Jersey or California, however, these contributions will be taxed for state income tax purposes. If you open an HSA on your own, you can make deposits into the account and then claim them as deductions come tax time.

You determine the specific amount you'd like to contribute each year, provided it doesn't exceed government-mandated limits (as of 2024, $4,150 for an individual and $8,300 for family coverage); those age 55 or older can contribute an extra $1,000 above these thresholds, known as a “catch-up contribution.”

You can fund the account through a deposit, transfer, or payroll deduction and then access funds using a debit card or checks to pay for qualified out-of-pocket healthcare expenses. Even if you later become ineligible for HSA contributions, you can still use the funds in your account for qualified expenses.

How an HSA can help you save money for future healthcare expenses

For starters, health savings accounts are generally triple-tax advantaged in that you can make pre-tax contributions (or claim deductions if you make after-tax contributions), the amount in the account can grow tax-free (outside of California, New Hampshire, New Jersey, and Tennessee), and you can use the money to cover qualified expenses in the absence of taxes.

You also don’t need to spend the balance in your HSA account every year; any leftover money automatically rolls over to the next one. In fact, your HSA funds will continue to do this on an annual basis and remain in your account indefinitely until used. When you consider that current retiree households spend an average of $7,540 annually on healthcare expenses (per the U.S. Bureau of Labor Statistics), it’s easy to see why this feature helps make HSAs so appealing.

HSA fees and taxes

Know that if you contribute funds beyond the aforementioned limits, you’re on the hook for a 6% tax on these excess contributions—and that if you have an HSA through your employer, any contributions your company matches also count towards your annual limit.

You should also not contribute more than what you can afford, as any amount withdrawn for non-medical purposes is subject to both income taxes and a staggering 20% early withdrawal penalty for those under 65. Once you reach age 65, HSA withdrawals made for non-medical uses are still subject to taxes but won’t incur this consequence.

Other facts to know about health savings accounts

A health savings account is portable, meaning money in your HSA remains available for future qualified medical expenses even if you change health insurance plans, switch companies, or retire.

Anyone can contribute to your health savings account—parents, aunts, uncles, friends, or even strangers who decide to help you save for healthcare expenses!

Another benefit of an HSA is that you can invest the account balance in mutual funds, stocks, and/or other investment tools (choices vary by provider). While such investments sometimes carry additional risk, these options can also help you—over time—potentially tuck away a lot more for retirement.

When you open an HSA, the IRS will prevent you from also having a flexible spending account (FSA). However (if allowed by your employer), you can qualify for a limited purpose FSA and use this exclusively for vision and dental expenses such as cleanings, fillings, vision exams, contact lenses, lens solution/cleaner, and prescription glasses.

Finally, know that once you enroll in Medicare, you can use the money in your HSA account to pay premiums, deductibles, copays, and coinsurance for Medicare Part B, Part D, and/or Medicare Advantage plans (Medigap premiums are a different story). 

In sum: how an HSA can help cover future healthcare expenses

Several tools can help you save for future healthcare expenses, and a health savings account is just one of them. If you’re eligible to open an HSA, certainly consider doing so as healthcare expenses will only continue to rise in the years to come.

Still have questions about Health Savings Accounts? Schedule a FREE discovery call with with one of our CFP® professionals.

FAQs

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.