While we all collectively get older by the day, some new realities rear their ugly head as I come to terms with health care when I retire. We know that Medicare is the only option for many Americans and we also know, it doesn't cover all the expenses. As a employee of a company who offers a HSA, I will admit it does a world of good to know, I have put aside money for medical expenses, notably, a high deductible PPO. Just so happens, in the WSJ today is a great article explaining the advantages over even a 401K. We must plan ahead.. to grow old gracefully.
HSAs Offer Benefits Over 401(k)s
BY ANNE TERGESEN
for retirement, there is a place to put money that may be even better than your
Most people overlook health-savings accounts, or HSAs, as a
retirement-savings vehicle. But these accounts, which were authorized in 2003,
come with more tax advantages than 401(k)s and individual retirement accounts
when used to cover medical costs, which are a major expense in retirement.“It’s
the most tax-preferred account available,” says Michael Kitces, director of
financial planning at Pinnacle Advisory Group Inc. in Columbia, Md. “Using one
to save for retirement medical expenses is a better strategy than using
retirement accounts” to cover those expenses, he says.
As with a traditional 401(k) or IRA, an HSA allows you to
set aside pretax money without paying federal or state income tax on it. Most
people who contribute through payroll deductions also save 7.65% in FICA tax,
which finances Social Security and Medicare.Money in HSAs grows taxfree and, if
used for medical expenses, also can be with- drawn tax-free. In contrast, with
a traditional 401(k) or IRA, you pay income tax on your withdrawals.
Due to this combination of tax advantages, HSAs—which are
paired with the HSA-qualified health plans available on health-care exchanges
and offered by 43% of employers— can be a better deal than a 401(k) with an
employer matching contribution. That is most likely to be the case if you are
in a high tax bracket and the 401(k) match is less than dollar for dollar, says
Greg Geisler, an associate professor at the University of Missouri- St. Louis.For
people with a high deductible health plan, “an HSA should be either the first
or second place they look to save” for later life, Prof. Geisler says. To open
an HSA, you must be covered by an HSA-qualified health plan.
For 2016, these plans have deductibles of at least $1,300
for individuals and $2,600 for a family. In return for exposing policyholders
to potentially higher out-of-pocket costs, the plans generally charge lower
premiums and offer individuals and families the chance to save up to $3,350 or
$6,750 a year, respectively, in an HSA. (Those over 55 can save $1,000 more). Because
employers save on premiums, too, with a high-deductible plan, many contribute
to employees’ HSAs as an incentive to get them to enroll, says Eric Remjeske,
president of Devenir Group LLC, which advises banks offering HSA investment
platforms. The biggest payoff with an HSA comes when the money set aside isn’t
all used for current medical bills and instead compounds over time, before being
used for qualified expenses.
Those expenses can include not just medical bills but also
dental and vision-care expenses, Medicare premiums and a portion of
long-termcare insurance premiums. According to Fidelity Investments, a
65-year-old couple who retire today and live another two decades will spend
$245,000 on expenses including Medicare premiums and the 20% of medical costs
Medicare doesn’t cover—a number that doesn’t include dental and long-term-care
“A lot of people don’t think about how to save for health
care in retirement, yet it’s one of the major expenses people will have,” says
Roy Ramthun, president of HSA Consulting Services in Silver Spring, Md. Once
you are enrolled in Medicare you no longer can contribute to an HSA. But you can
continue to tap your HSA balance for medical expenses for yourself, your spouse
and any dependents you may have. You also can use your HSA for nonmedical
expenses, but you will owe income tax on your distributions—and a 20% penalty
if you are younger than 65. Experts recommend those who can afford to
contribute to an HSA and a 401(k) kick in the maximum to both. Some employees
may want to allocate enough dollars to a 401(k) to get the company match and
then direct the next dollars of savings to the HSA.
WEALTH ADVISER Money in HSAs grows tax-free and, if used for
medical expenses, also can be withdrawn taxfree.