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Planning & Economy

Planning for Medical Expenses in Retirement

March 22nd, 2021

One of the most consequential budget items retirees will have to contend with during retirement is the seemingly, ever-increasing medical costs.  But how do people prepare for the rising medical expenses that they are likely to incur during retirement?  As an Example, Year-over-year medical costs have increased anywhere from 2%-8%. That is where a Health Savings Account can play a role in your financial plan.

What is a Health Savings Account?  It is a tax-advantaged account almost like a 401(k) but takes one step further.  Some people refer to this account as a triple-tax-advantaged account, meaning that you can contribute to the account pre-tax, the earnings grow tax-deferred, and you can use the funds to pay for qualified medical expenses tax-free.  How cool is that?!  And, It gets better, the money, if not used, is rolled over year-over-year, allowing for long-term savings, meaning that you can use the money that you saved during your career to pay for medical costs during retirement.

HSA is a great tool to utilize while planning for retirement, so why have you not heard about it until now? Health Savings Accounts were created for participants of a High Deductible Health Plan (HDHP).  A high deductible health plan is similar to a traditional insurance plan with a higher deductible and a much lower monthly premium than standard plans.  Because of the higher out-of-pocket costs associated with the high deductible health plan, the HSA was created to help cover those costs.

So now you know, you must be a participant of a high deductible health plan to contribute to an HSA.  But if you do have access to an HDHP, then an HSA is a great tool to plan for your medical expenses now and in retirement.  Another advantage HSAs offer is that you can rollover your 401(k) or traditional IRA once in your lifetime into your HSA.  This allows you to use your pre-tax savings to pay for qualified medical expenses tax-free.  However, you can only roll over the annual contribution limit, for example 2021 limits are $3,600 for individuals and $7,200 for family coverage with a $1,000 catch-up contribution to age 55 or older.  This could be a great strategy if you were expecting a large qualified medical expense and you had savings in your 401(k) or IRA to cover the costs tax-free.

You may be wondering now, what constitutes a qualified medical expense?  You can use your HSA to pay for co-payments, most types of medical surgeries, prescription and most non-prescription drugs, long-term care services, and even long-term care premiums up to certain limits.  These are the costs that are continuing to increase over time and by having an HSA may be a benefit to you and your family.

As you can see, HSA’s provide a great resource to participants in high-deductible health plans.  If you have access to an HSA, now may be the time to start contributing.  Even if you are not eligible to contribute to an HSA, make sure that you are taking the appropriate steps to begin planning for your ever-increasing medical costs during retirement.





HSAs are never taxed at a federal income tax level when used appropriately for qualified medical expenses. Also, most states recognize HSA funds as tax-free with very few exceptions. Please consult a tax advisor regarding your state’s specific rules. Investments available to HSA holders are subject to risk, including the possible loss of the principal invested and are not federally insured or guaranteed. HSA holders making investments should review the applicable fund’s prospectus. Investment options and thresholds may vary and are subject to change. Consult your advisor or the IRS with any questions regarding investments or on filing your tax return. Before making any investments, review the fund’s prospectus.

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