An important aspect of planning for retirement is to coordinate and maximize the advantage of all the tools and resources available. Here is a tip. Yes, some individuals with high health care costs may have to tap their HSA before retirement. However, in the absence of a chronic medical condition, the odds are with you.

As Health Savings Accounts (HSAs) gain popularity both in the workplace and in the marketplace, more and more consumers are beginning to understand the value of health savings accounts beyond just paying for current healthcare expenses tax-free.   Many consumers have viewed the HSA as a super FSA (flexible spending account) and are choosing to spend down their HSA with current year out-of-pocket health care expenses and allowing any excess expenses to accumulate.

We were well-trained on FSAs to spend down our current year expenses but with the HSA, we have the option to spend it down or save it and let it accumulate tax-free.   The real power of the HSA is allowing it to accumulate and grow tax-free, which allows use of the HSA to pay for out-of-pocket health care expenses in retirement with tax-free dollars. As such, for those with the means to pay out-of-pocket healthcare expenses during their working years with non-HSA funds, the HSA is really best thought of as sitting alongside a 401(k) plan as a retirement plan benefit.

The HSA Is a Beneficial Retirement Account   Some workers mistakenly think that Medicare will be free and that they will have all their medical expenses covered by Medicare, so when they arrive at retirement it’s quite a shock to learn otherwise. The cost of Medicare Part B and D, along with a supplement to Medicare can often exceed in cost what the worker was paying when they were working.   In addition, Medicare does not cover everything. According to Fidelity, a person who retired in 2019 can expect to spend approximately $150,000 out-of-pocket in health care and medical expenses throughout retirement. RDQ NOTE: There are great variables in the actual health care costs incurred by an individual retiree.

An HSA can reimburse Medicare premiums as well as uncovered medical expenses including dental, vision (eyeglasses), qualified long-term care services, and hearing aids. Instead of paying for these expenses using after-tax money from a traditional 401(k), tax-free HSA funds can be used. Relying on a traditional 401(k) or IRA to pay for those expenses will require about 25% more money to pay those expenses (or $187,500 to fund $150,000 in expenses).

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