Health Savings Account – A “triple tax-free” solution for retirement’s biggest expense.

June 25, 2023

For most people, medical expenses will be the biggest expense in retirement. According to the Fidelity Retiree Health Care Cost Estimate, a single person age 65 in 2023 may need approximately $157,500 saved (after tax) to cover health care expenses in retirement. An average retired couple age 65 in 2023 may need approximately $315,000. That is a huge number, and unfortunately, those costs are only going higher with each passing year.

However, for people still in their working years there is one retirement savings vehicle we highlighted in a previous blog.

Health Savings Accounts are Triple tax-free.

Health Savings Accounts (HSA)s are offered to any individual covered by a high deductible health plan (HDHP).

  • HSA contributions are made pre-tax, similar to a 401k contribution. Contribution limits are $3,850 for individuals or $7,750 for families.
  • You can invest the contributions into a variety of investments offered within the plan. Just like a 401k, different HSAs will offer different investment options.
  • When you use distributions for qualified medical expenses, the distributions are tax-free. The includible expense list is very extensive but includes many big-ticket items such as long-term care insurance premiums, Medicare part B and part D.

Do you already have an HSA?

According to a 2022 survey by the Employee Benefits Research Institute, just 12% of all health savings accounts were invested in anything other than cash. That means 88% of people who currently have HSAs are missing a great opportunity. It is impossible to leverage the tax-deferred and tax-free benefits if the investments do not have time to grow tax-preferred in the first place.

Is an HSA right for me?

Anyone who plans on one day retiring should consider an HSA. If you are generally in good health and have minimal annual healthcare costs, HSAs are the most powerful retirement savings tool available. The key to maximizing the benefit is to maximize the annual contribution, invest the funds within the plan and pay actual medical expenses out of pocket.

The HSA offers investors a unique opportunity to address one of the largest expenses in retirement in their earning years. This is one of the most overlooked yet most powerful tools for people in their earning years as they look ahead to retirement. This time of year, most employers are doing their annual benefits enrollment, which means now is the time to see if you can access an HSA and start using the best retirement savings tool available!

Pro-tip: If you are already maxing out your 401k and IRA, the HSA offers another way to stash cash for retirement!