A recent study from Fidelity estimates that an average 65-year-old couple retiring this year will need to have $295,000 in today’s dollars for future medical costs.
So what is an effective way to save for medical expenses in retirement? Consider a Health Savings Account (HSA).
1) Contributions are pre-tax and avoid FICA tax if made through payroll deduction.
2) There are no income phaseouts for contributions and withdrawals from an HSA.
3) Some HSA providers allow you to invest in a variety of investment vehicles, including stocks and bonds.
4) The money remains in your HSA year over year, and you can take it with you from employer to employer or when you retire.
5) You will not pay tax on your HSA contributions and earnings if you use it to pay for qualified medical expenses.
6) You can use the money for nonmedical expenses after 65, but you will be taxed at ordinary income rates. However, If you are under age 65 and use it for nonmedical expenses, you will pay ordinary income tax rates on the withdrawal AND a 20% penalty.
7) HSA’s don’t have required minimum distributions when you reach 70 1/2.
So if you can afford to pay for current medical expenses from your savings or cash flow, your Health Savings Account can also serve as an effective retirement savings vehicle.
At Austin Asset, we are Fee-Only Financial Advisors. We seek to bring clarity and purpose to wealth through authentic and enduring relationships. For Life.