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Money August 2017

Dollar Sense

Consider a Health Savings Account to Boost Your Retirement Savings

By Teresa Ambord

You can only contribute to an HSA until you become eligible for Medicare Part A benefits, generally 65 years old. You can still have an account and take distributions from it, but you can no longer contribute to it.

If retirement is on the near horizon for you, you’re already aware of two things:

  • The amount you can save in a retirement account is limited by law, and
  • Medicare is not a panacea that covers everything.

So what does this have to do with a health savings account (HSA)? Plenty. If you want to contribute more money than you’re allowed to with your 401(k) or other retirement plan and enjoy triple-tax advantages, an HSA may be right for you.

Here are the tax benefits:

  • Contributions to your HSA plan are tax deductible.
  • The interest and earnings in your plan grow tax free.
  • Distributions are tax free, as long as they are taken for qualifying medical expenses.

Unlike some other types of medical expense plans (such as a flexible spending account), there is no requirement to use all the funds in the account in the same year they are added. As an HSA participant, if you have a balance in your account at the end of the year, you can leave it there without penalty. Let the money grow without losing any to tax, and in your retirement years, use it to pay inevitable medical costs.

You can even reimburse yourself for Medicare Part B premiums which are deducted from your Social Security check. And you can pay certain insurance premiums out of HSA money, such as long-term care coverage, health coverage while you are unemployed, and COBRA plans.


The Cost of Health Care

One of the biggest and most unpredictable expenses you’ll face in retirement are your medical costs. An HSA is a way to save for those expenses. A report by HealthView Services in 2016 showed that a couple ages 65-84 spend an average of $7,725 per year for healthcare costs. For a couple ages 85 and up, that figure leaps to $28,644 (these costs are reported in future dollars).

It is true that HSAs work best for people who are relatively healthy and don’t anticipate high medical costs early in the year, or who are able to cover the deductible with a credit card or savings and wait to be reimbursed as their HSA balances build up. If you expect to incur high medical costs early in the year and you cannot cover the deductible and wait to be reimbursed out of your HSA account gradually, you may want to skip the HSA option. Or, talk to your doctor to see if he or she would let you pay your bill as you are reimbursed by your HSA plan.


How Does an HSA Actually Work?

Not everyone qualifies for an HSA. You must be enrolled in a high-deductible health plan (HDHP) which works in coordination with your HSA. What qualifies as an HDHP in 2017? For a self-only plan, it’s a minimum of $1,300 and for family coverage, $2,600. Keep in mind, the premiums that go with an HDHP are generally much lower than you may be used to paying now. Your balance can grow year over year, and move with you if you change jobs.

If you’re having HSA contributions deducted from your paycheck (or if you’re front-loading your account yourself), it may be a good idea to contribute at least enough to cover the deductible. So let’s say your deductible is $1,300 and you are paid every two weeks (26 paychecks per year). That’s $1,300/26 = $50 per payday to cover your deductible over the course of the year. But as an individual, you can contribute much more.

For 2017:

  • A self-only plan, $3,400 (rising to $3,450 in 2018). For those age 55 and up by the end of the year, add $1,000 to the limit.
  • A family plan, $6,750 (rising to $6,900 in 2018). For those age 55 and up by the end of the year, add $1,000 to the limit.

HSAs, like all plans, have a maximum out-of-pocket too:

For 2017:

  • A self-only plan, $6,550 (rising to $6,650 in 2018).
  • A family plan, $13,100 (rising to $13,300 in 2018).

Other points you should know:

You can only contribute to an HSA until you become eligible for Medicare Part A benefits, generally 65 years old. You can still have an account and take distributions from it, but you can no longer contribute to it.

And, if you take funds out of your HSA for non-medical expenses (before you retire), there will be penalties of 20%. However, once you reach age 65 or enroll in or become eligible for Medicare, withdrawals for non-medical expenses are no longer subject to penalties but amounts you take out to spend on non-medical expenses are taxable.


Are There People Who Should Not Have an HSA?

It can be a problem for people who have high medical expenses and no financial backup. For example, if you have a self-only plan with a $1,300 deductible, you’ll need to have a way to pay that with cash or a credit card just in case you have a large medical expense early in the year.


Unsure About a Health Savings Account?

Health savings accounts (HSAs) are growing in popularity because of the tax advantages they offer, the flexibility, and the control they give you over your own health care costs. But how do they work? Here are some examples to help you understand:

Susan has an HSA, which means she also has a high-deductible health plan (HDHP) with a deductible of $1,300. Out of each paycheck she pays HDHP premiums of $25, and she contributes $75 to her HSA balance. By the end of March, she has built up a balance in her HSA of $450. In early April, she visits the dentist and incurs a bill of $85. She will receive a check from her HSA for $85. Or, she can choose to pay it out of pocket and let her balance build, without tax implications.

Suppose instead of a bill for $85, she incurred a bill for $600 while her HSA had a balance of $450. She’d receive a check for $450. Then as more money went into her HSA, she’d continue to receive checks until her full expense was covered. In that case, Susan would need to cover the cost of the bill until she was reimbursed, or ask her dentist to let her pay as her reimbursement was received.

Have more questions about HSAs? Read what Kiplinger has to say by logging onto:


Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.

Meet Teresa