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As individuals near retirement age, they typically start to review their financial stability—and the continued rise in health care costs tends to be among their primary concerns. According to a report released by Fidelity Investments, the average retired couple will need $285,000 to pay for medical expenses through retirement in addition to long-term care expenses….
As individuals near retirement age, they typically start to review their financial stability—and the continued rise in health care costs tends to be among their primary concerns. According to a report released by Fidelity Investments, the average retired couple will need $285,000 to pay for medical expenses through retirement in addition to long-term care expenses. One way to save money for those health care expenses is through a health savings account (HSA).
A popular benefit offered by employers, HSAs are available to people who have high deductible health plans (HDHPs). The account is set up like a traditional personal savings account, but the money withdrawn can only be used to pay for qualified health care expenses. This may include doctor visits, hospital care, dental exams and corrective vision expenses.
Should you start an HSA later in life?
While it is always better to open an HSA early so the money can grow over time, starting one at age 55 or later isn’t a bad idea. In 2019, individuals can deposit up to $3,500 per year while families can deposit up to $7,000. Once you’re at least 55, you can make an additional contribution of $1,000 every year. However, you’ll need to keep the requirements in mind. Medicare is not an HDHP, so if you want to enroll in the government-sponsored health plan once you turn 65, you can no longer contribute pre-tax dollars to your HSA. However, you can continue to withdraw money from an existing HSA after you enroll in Medicare to help pay for medical expenses. These can include Medicare premiums, copayments and deductibles. The money you withdraw will be tax-free as long as you use it for qualified medical expenses.
You can also use an HSA to help cover the costs of a plan purchased on the health exchange. Because insurers are allowed to base premium costs on age, your costs may rise as you get older. A Silver plan for a 64-year-old, for example, would cost $1,123 per month. That’s three times more than a 21-year-old would pay for the same plan, or $374. Using money set aside in an HSA to pay for these insurance premiums would make costs more manageable for retirees.
No matter your age, it’s important to contribute to an HSA. If you’re 55, you can start contributing the maximum $4,500 per year. After 10 years, you’ll have $45,000 saved
Remember, location matters.
High deductible health plans can help you lower your premiums, but you’ll pay more out of pocket if you need medical care. Where you live also plays into the cost of your health insurance plan. New Jersey residents, for example, pay an average of $3,684 annually, while Utah residents only pay $2,160 on average annually. An HDHP paired with an HSA could be more beneficial to people with the highest health care costs.
Combining an HSA with traditional health insurance helps employers cut down on health insurance costs and saves employees from paying too much out of pocket for both care and policy premiums.
HSA owners can deposit money from each paycheck into their accounts. Many choose to use the funds immediately; however, individuals planning for the future may decide to keep the money in an HSA and use it later, such as during retirement. Contributions are taken from your pretax income, and any withdrawals you make that are used for qualified medical expenses are tax-free.
There are many benefits to opening an HSA, but it’s best to know how much you want to save so you can meet your goals.
About the author
Maxime Rieman is Product Manager at ValuePenguin. Educating and assisting shoppers about financial products has been Rieman's focus, which led her to joining ValuePenguin, a consumer research and advice company. Her previous work has been featured across the web, on Newsmax, ThriveGlobal and Forbes.