How Health Savings Accounts Can Help You Save For Retirement
Health costs may be crushing America, but health savings accounts can help.
Health care costs in the U.S. have skyrocketed over the past decade, and with it, medical-related debt. A study published in the American Journal of Medicine revealed that medical debt is the primary cause of personal bankruptcy. Among those who file for bankruptcy, three-quarters reported having some type of medical insurance.
75 million people in the U.S. report problems paying their medical bills or are paying off medical debt, according to a study from The Commonwealth Fund. Bankrate found that one-in-four Americans say they owe more in medical debt than they have saved in an emergency fund, and more than 50 percent expressed concern that medical bills may one day overwhelm their finances.
At the same time, health savings accounts (HSAs), which help patients protect themselves from crushing medical bills, are on the rise.
A HSA is a tax-advantaged medical savings account available to people enrolled in high-deductible health plans (HDHP). They are like personal savings accounts, but the money is used to pay for health care expenses. Contributions to HSAs are 100 percent tax-deductible, tax-free, tax-deferred; and unused money isn’t forfeited at the end of the year. The account owner, rather than an employer or health insurance company, retains complete control. Even if your employer contributes to the HSA, that money is still yours if you switch jobs.
As mentioned above, you need an HDHP policy to be eligible, and the deductible must be at least $1,250 for individual coverage or $2,500 for family coverage. HSA owners can make pretax contributions of up to $3,300 a year for individuals, and $6,550 for family coverage. People age 55 and older can save an extra $1,000 a year. The money can be spent on out-of-pocket medical expenses such as deductibles, copayments for medical care and prescriptions drugs, and bills not covered by insurance. Most HSAs offer multiple options for withdrawals.[caption id="attachment_713113" align="aligncenter" width="640"] Source: iStock[/caption]
Pros and Cons
There are a number of potential advantages and disadvantages to consider when deciding if an HSA is right for you. One major benefit is gaining greater control over health care savings and expenses. HSAs offers more flexibility getting coverage for services like acupuncture or vision, which may not be covered under traditional health plans. They are also a way to protect yourself from going into debt over catastrophes or unanticipated costs.
HSAs can also act as another avenue to fund retirement accounts, particularly for people who are already reaching the limit of their 401(k) and IRA. If medical expenses are low, HSAs can accrue substantial amounts, and once you turn 65, you can make penalty-free withdrawals. Of course, the fact that the money is untaxed is a pro as well.
However, many medical organizations oppose HSAs because they say they only benefit the healthy, wealthy, and young. Low-income people are generally not eligible for this type of coverage, and people who are older or sicker may not be able to save as much. Stanford economist Victor Fuchs said they also have the effect of making the health care system more expensive for everyone else. “The main effect of putting more of it on the consumer is to reduce the social redistributive element of insurance,” he wrote.
The Mayo Clinic lists other potential disadvantages, including that pressure to save money in an HSA might prevent people from seeking medical care when they need it. Furthermore, illnesses can be unpredictable, which makes it difficult to accurately budget medical expenses. And if you take money out of the HSA for non-medical expenses before the age of 65, you have to pay taxes on it.
HSAs and Retirement
For many Americans, health care represents one of the largest expenses in retirement. Fidelity said that the average 65-year-old couple retiring this year will require $220,000 to cover their medical costs. HealthView Services estimates that an average healthy couple retiring 10 years from now will need their entire Social Security benefit just to cover health-care costs. HSAs are a viable way to tame these costs, and thus can play an important role as part of an overall retirement savings plan.
HSAs are not limited to cash, and like retirement accounts, the savings can go into stocks or equity mutual funds. If your goal is to save up for retirement medical costs rather than current costs, then it makes sense to put money into long-term investments like mutual funds rather than keeping it in cash. However make sure to create a well-balanced, low-risk portfolio so you don’t end up in a medical emergency with no money to pay for it. And if your goal is not to touch the money in the present, make sure you have enough cash on hand to cover near-term expenses.
The views expressed represent the opinion of the author and are not intended to reflect those of FutureAdvisor or serve as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell securities. Past performance is not indicative of future results.