The Importance of Health Savings Accounts (HSAs), Ep #35 

What are health savings accounts (HSAs)? How can an HSA be beneficial to you and your retirement? One of my listeners asked me to cover HSAs, so this episode of Retirement Made Easy is dedicated to them. But if you’re wondering what the big deal about an HSA is, don’t miss this episode!

You will want to hear this episode if you are interested in…

• [1:51] ALL about Health Savings Accounts
• [3:13] What qualifies as medical expenses?
• [4:24] HSA funds can be invested
• [8:52] Why is an HSA important?
• [10:30] How can an HSA be used?

What is an HSA?

A health savings account is a way for you to put tax-deductible funds into an account earmarked for health expenses. Many employers offer it which makes it easy to contribute through your paycheck. A family can contribute up to $7,100 per year and if you’re over 55, you can “catch up” by contributing an additional $1,000 per year. If you know you will have medical bills or co-pays in the future, it’s a great way to set money aside.

But what qualifies as medical expenses? Office visit copayments, health insurance deductibles, dental expenses, vision care, prescription drugs + insulin, medicare premiums, hospital bills, x-rays, and much more. An HSA can be used for all of these things. Overall, medical costs are on the rise. It’s important to save and plan for those expenses because they will only go up.

HSA funds can be invested

Did you know that the money you have in an HSA can be invested? Many HSA providers allow you to invest in mutual funds. You can stay conservative and risk very little. Or, you can invest it so that it will grow for years. If you see yourself using the funds within 5 years, I’d be more conservative with those dollars. If you see the funds being used beyond 5 years, shoot for growth with mutual funds.

The money that grows is tax-deferred and can be withdrawn tax-free if used for medical care. When you’re in your 80s and you need nursing care, those HSA dollars can be used to pay for those expenses. Just like an IRA, you’ll want to have a beneficiary on your HSA in case something happens to you. The money can be transferred to someone else.

IRAs—once you hit age 72—have a required minimum distribution. HSAs are not the same. If you don’t have medical expenses, you don’t have to make a withdrawal. They can continue to grow. Even better, an HSA is money that’s yours forever. It is NOT the same as an FSA (a Flexible Spending Account).

Why is an HSA important?

A survey done by Fidelity found that in 2019, the lifetime cost of healthcare for a retired couple was $285,000. In 2020, the same couple’s average costs for the rest of their lives was $295,000. A lot of things can’t be controlled. You don’t know what taxes will be in the future or how much healthcare will cost.

But you can control how much you fund in an HSA between now and retirement. You can contribute to an HSA until you’re required to start Medicare. You can fund an HSA and get a tax deduction for doing so. An HSA can be a win-win—and you will use it.

How can an HSA be used? How long can you contribute? How else can it benefit you? Learn more by listening to the whole episode of Retirement Made Easy!

Resources & People Mentioned

• Planning for Healthcare Costs in Retirement