The Retirement Savings Tool You May Be Missing

Mike Gann Managing Medical Expenses, Retirement Planning

What are the tools you’re using to save for retirement? If you’re like many Americans, you probably participate to a 401(k) and you may even contribute to an IRA. Perhaps you also use tools like annuities, investment accounts, and more.

There’s one tool, however, that could be a valuable savings resource even though it usually isn’t associated with retirement. It’s a health savings account, also known as an HSA. Health savings accounts are individual accounts that you can use to pay for medical costs.

An HSA can be used at any age. It’s not specific to retirement, like an IRA or 401(k). However, it can be a valuable retirement savings vehicle and act as a supplement to your other retirement accounts.

What makes an HSA so helpful in retirement? The substantial medical costs that many retirees face. According to a recent study from Fidelity, the average retired couple will spend nearly $260,000 on out-of-pocket health care costs.1 Those costs include things like deductibles, copays, prescription drugs, premiums and much more. Fidelity’s estimate does not include costs for long-term care or in-home assistance.

Many retirees assume that Medicare will cover all their medical expenses, but that assumption is usually incorrect. Medicare is a valuable resource for retirees, but it usually covers only a portion of your expenses. There are some types of care that aren’t covered at all. That means many retirees face sizable bills that they must pay out of pocket.

An HSA helps you cover those medical bills in a tax-efficient manner. Still not sold on using an HSA as part of your retirement strategy? Below are a few reasons why an HSA could be an important funding tool for you:


Tax-Favored Treatment

One of the HSA’s most attractive features is its tax treatment. HSAs offer tax efficiency for contributions, account accumulation, and even distributions.

The tax efficiency starts with your contributions, which may be deductible depending on your income and the amount of the contribution. Your contributions then grow on a tax-deferred basis while they stay in the plan. That means that you don’t pay taxes on any growth that accumulates inside the HSA. You can defer those taxes as long as you would like.

When you’re ready to use your HSA funds, you can take tax-free distributions to pay for qualified medical expenses. If the money is used for an expense that isn’t qualified, you could face taxes and possibly early distribution penalties if you’re under age 59½. As long as you use the money for health care, however, your HSA can be a highly tax-efficient savings vehicle for medical expenses.


Accumulation Potential

Many people assume that they must use their HSA money within the calendar year that they make their contributions. The truth is that your HSA balance can carry over from year to year. There’s no requirement to use it within a certain timeframe. That means your HSA funds have the potential to grow and compound over time.

Also, your HSA balance isn’t tied to your job. Although your contributions may come out of your paycheck, you keep your balance with you when you leave your employer. You can keep contributing to your HSA at each job you have and even after you retire.



Finally, while HSA funds must be used to pay for medical expenses, the IRS actually has a very broad definition of what constitutes a qualified expense. Nearly any payment to a medical services provider, such as a doctor or hospital, is considered to be qualified. Copays for prescriptions and other services qualify. Even payments for medical supplies can qualify as a medical expense.

You could also use your HSA to pay for long-term care costs. For instance, you may need to pay a home health aide to come to your house and assist with basic tasks. Or you may need to modify your home to accommodate a wheelchair. You could use your HSA funds to pay those costs.

Ready to develop your retirement health care funding strategy? Let’s talk about it. Contact us today at Advantage Retirement Services. We can help you analyze your needs and create a plan. Let’s connect soon and start the conversation.




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16766 – 2017/6/20