By Michaela Scott
Anyone who plans to retire must also plan for the inevitable healthcare costs that come with aging.
According to estimates from recordkeepers and employee benefit research organizations, the average retired couple will spend over a quarter million dollars for healthcare and medical expenses in retirement. That is baseline, and without proper planning, a single healthcare emergency – which already carries financial burden and stress – can derail a retirement plan and create a self-reinforcing cycle of health and financial problems.
Financial advisors are not doctors, so we may not call it malpractice, but ignoring clients’ healthcare needs is definitely negligent. The scale of the necessity requires us to help both individual and corporate clients plan for current and future healthcare costs. One way to keep clients on track is by taking advantage of an underused and underexplained financial tool: Health Savings Accounts, or HSAs.
Benefits Of HSAs
HSAs allow those who have them to save money for current or future qualified healthcare costs in an extremely tax-advantageous manner. In most states, money attached to an HSA is deposited tax-free, grows tax-free and can be spent tax-free.
This is a crucial difference with money invested in retirement accounts like IRAs or 401(k)s, which is taxed either before it’s invested, in the case of a Roth, or when it’s withdrawn. Like retirement accounts, HSAs can grow long-term because they roll over in perpetuity, so funds a client deposits at age 30 can be spent when they’re 70. “Qualified healthcare costs” is also a larger category than you might assume, with even some products sold on Amazon eligible, along with some Medicare premiums.
HSAs can save clients thousands of dollars in taxes over their lifetimes. If clients contribute to an HSA early, invest the funds and let it grow, they can gift themselves pools of money to ensure better quality healthcare in retirement.
What if your client wants to spend their HSA money on things other than health care costs in retirement? HSA owners over 65 can withdraw from their HSA account for non-medical reasons and simply pay the same taxes they would on a traditional IRA withdrawal. Conversely, clients are allowed a once-in-a-lifetime opportunity to roll IRA money into an HSA.
This can be especially handy if clients do not have enough cash flow to contribute to their HSA. Or, if they must turn right around and spend money on a qualified healthcare expense, but want to avoid the IRA early withdrawal penalties. Naturally, with anything tax related we have clients consult with their tax advisors.
But the best way clients can use HSA funds is to not. Meaning, even if they have a qualified healthcare expense, they pay out-of-pocket and keep their HSA money invested until retirement. They should be careful to keep their receipts because, currently, receipts do not expire and can be reimbursed from an HSA account at any time. A client can build up 10k in receipts and decide to reimburse themself for these already-paid qualified medical expenses from their HSA.
Nuts And Bolts
Though they can bring enormous benefits to those who use them, HSAs will not be the best option for all clients. HSAs are only available for those with qualifying high deductible health plans (HDHPs). Some companies might not offer this type of program, and some people who expect to need more healthcare in any given year may forego an HSA eligible health plan.
This includes chronically ill individuals, those with severe or acute conditions like cancer and anyone who is expecting a high cost health event (like a pregnancy). Analyzing your clients’ health insurance options includes factoring premium savings and employer contributions to the HSA to see whether the higher deductible is worth it.
Luckily, individuals who drop HSA-eligible health insurance plans do not lose their HSA accounts. New contributions cannot be made, but the funds already in the account can still be used, and individuals can start contributing again if they reacquire a qualifying HDHP plan.
Provided an HSA is correct for a client, they should maximize contributions ($3,600 annually for single clients and $7,200 for those with a family HDHP, minus employer contributions). For clients over 55 there is a $1,000 catch-up each.
In terms of prioritizing savings for retirement, we typically recommend maxing out on the employer match to the retirement plan, then look to max the HSA, then go back to the retirement accounts. This creates flexibility for today and tax diversification for clients spending and enjoying money in retirement.
Many advisors do not discuss HSAs or healthcare in general with their clients for a good reason – health insurance is unfortunately complicated. As educated and capable as we are, financial advisors are human, and it can be hard to discuss a topic we may not fully understand ourselves with clients. Even if advisors do understand, they may be hesitant to bring up yet another complicated topic in yet another intense discussion.
Despite the obstacles, advisors must open these discussions. The potential benefits to clients are just too significant to pass up, and HSAs are in the best financial interests of millions of Americans. Advisors with corporate clients must also push for employee education on HSAs and broader financial literacy. If HSAs are too far outside an advisor’s area of expertise, they should consider partnering with another professional who can provide the necessary knowledge.
Our clients may assume we tell them all they need to know, and that assumption can cause problems if advisors fail to deliver on it. By educating clients about HSAs and the broader importance of healthcare for retirement planning, advisors can help provide a critical piece of the overall retirement puzzle.
About The Author
Michaela Scott, CFP®, MSFS, leads Borislow’s Employer Retirement Consulting Practice, which offers advisory services through Royal Alliance Associate, Inc. (RAA), member FINRA/SIPC, and not affiliated. She has been an MDRT member for six years. Michaela earned her Master of Science in Financial Services with a concentration in Retirement Planning from the American College of Financial Services. She is also a Retirement Income Certified Professional. Michaela co-authored If I Had Only Known – Checklist and Guidance for Before and After Death with Jennifer Borislow and Melissa Marrama. Michaela lives in Hampton, New Hampshire. 978-722-1104, Borislow Insurance, One Griffin Brook Drive, Methuen, MA 01844.