Using Health Savings Accounts for Retirement Planning

By Mike Rowan, 11/13/2009

HSAs: A Tax-free Medical Investment Fund and Additional Retirement Account

The lack of health insurance is one of the biggest reasons more people don't retire before age 65. In addition, many Americans reach retirement age woefully unprepared for the medical expenses they'll face. Establishing an HSA, or Health Savings Account, is one solution that can be used to build up money for medical expenses incurred during retirement.

During retirement, the average couple retiring in 2008 will need $225,000 just to cover medical expenses according to Fidelity. This estimate, up an average of 5.8 percent a year since 2002, includes:

The cost of Medicare Part B and Part D premiums

Co-payments

Deductibles and excluded benefits

Out-of-pocket costs for prescription drugs

Vision and Dental Services

The Numbers about Health Expenditures don’t Lie

Furthermore, these figures do not even include the cost of over-the-counter medications and long-term care insurance if needed. If you take these into consideration, the Employee Benefit Research Institute estimates that you’ll need nearly $300,000 over the course of your retirement.

It is a fact that medical costs are rising more than three times faster than salaries. As a result, individuals should be factoring life-long health-care expenses into their overall financial planning. HSA plans are overlooked typically in leiu of traditional retirement plans such as a 401k or company pensions. However, as the figures above illustrate, this is one planning scenario that generally isn’t part of the overall financial plan.

How HSAs or Health Savings Plans Work

According to Wikipedia, A health savings account (HSA), is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a High Deductible Health Plan (HDHP). The funds contributed to the account are not subject to federal income tax at the time of deposit. Unlike a flexible spending account (FSA), funds roll over and accumulate year over year if not spent.

HSAs are owned by the individual, which differentiates them from the company-owned Health Reimbursement Arrangement (HRA) that is an alternate tax-deductible source of funds paired with HDHPs. Funds may be used to pay for qualified medical expenses at any time without federal tax liability. Withdrawals for non-medical expenses are treated very similarly to those in an IRA in that they may provide tax advantages if taken after retirement age, and they incur penalties if taken earlier. These accounts are a component of consumer driven health care.

HSA Contribution Limits

Your HSA contributions will not affect the limits on your IRA or other retirement account. The contribution limits are $3,000 per year or $3,600 for those over 55. In a nutshell, it's just another tax-deferred way to save for retirement, with the advantage being that you can withdraw funds tax-free if they are used for medical expenses.