Despite the increase in boomers retiring, 27% of retirees feel not too confident, or not at all confident, in their ability to live comfortably in retirement, according to the 2023 Employee Benefits Research Institute‡ Retirement Confidence survey. This lack of confidence comes at a time when the estimated cost of healthcare during retirement is $166,000 for a man, $197,000 for a woman, or $383,000 for a 65-year-old couple, an increase of $20,000 from 2022. This estimate assumes the retirees will have a 90% chance to have enough money to cover premiums and prescription drug expenses in retirement (EBRI‡).

With more boomers entering into retirement at an accelerated rate, the question of how to pay for healthcare expenses during retirement is more prevalent than ever.

Using HSAs for retirement expenses

One way to plan for future healthcare expenses is with a health savings account (HSA), a long-term savings option available when using a qualified high-deductible health plan (HDHP). Over the past decade, HDHPs paired with an HSA have steadily grown with the number of people enjoying the advantages of a tax-free way to pay for today’s rising healthcare expenses. However, only a small number of people are benefiting from the real power of HSAs—funding future health care needs in retirement. A 2023 study‡ found that even fewer people are unlocking one of the greatest advantages of an HSA, with only 12% of accountholders investing their HSAs in anything other than cash.

HSAs can play a crucial role in increasing retirees’ confidence to prepare and save for future medical expenses, so they shouldn’t be overlooked when planning for retirement.

Understanding HSA contributions

An increase in the 2023 contribution limit to funding HSAs can create opportunities for people to invest in their financial future by allowing them to control their healthcare spending and retirement planning. In 2023, an individual with an HDHP can contribute up to $3,850 to their HSA. In addition, for family coverage, the contribution limit has increased to $7,750. If you are 55 or older, you can contribute an extra $1,000 at the end of the year, as a catch up contribution.

Also, do not forget contributions to your HSA are tax deductible and can be adjusted to match your financial needs. Remember to monitor your contributions and savings to ensure you have enough funds to cover your deductible. Your employer might also contribute to your HSA in either an initial lump-sum, match or incentive over time.

Unique attributes of HSAs

An HSA offers many unique attributes that you should keep in mind when considering how one can help you in your retirement planning:

  • It serves as a spending and savings account
  • Offers investment earning potential
  • Triple tax advantage
  • Reduces taxable income
  • Can be used to pay for family members’ medical expenses
  • Expanded use after 65 years old, with the ability to take penalty-free distributions from your HSA
    • You are allowed to use your HSA funds for medical and non-medical expenses; however, in order for the distribution to be truly tax-free and penalty-free it has to be used for qualified medical expenses – withdrawals made for other purposes are subject to normal taxes
    • Participation in certain types of Medicare can make you ineligible to contribute to your HSA, but you are still able to use the funds you have in your HSA for expenses
    • If you opt not to enroll in Medicare, you can still contribute to your HSA after age 65
  • Your account is always yours, even if you switch jobs, find yourselve no longer enrolled in a high-deductible health plan or finally retire

HSAs can also serve as a savings option with flexibility, see how below:

  • Doubles as an emergency fund
  • Flexible contributions
  • Investment opportunities
  • Catch-up contributions
  • Portability
  • Tax-savings
  • Consolidation opportunities

You can also take advantage of a one-time option to move funds from an individual retirement account (IRA) to your HSA, as long as you are eligible to contribute to it. HSAs have so much to offer for you and your retirement planning needs.

HSAs as an investment vehicle

HSAs can be used like traditional retirement savings accounts, as many allow accountholders to invest the money they contribute, like a 401(k) or traditional IRA. Major HSA providers now offer multiple investment options, including money market funds or self-directed accounts for mutual funds. How you choose to invest your HSA will be based on your unique financial situation and goals, so do not be afraid to lean on your trusted financial advisor for guidance. In addition, be sure to check the  minimum balance required for investing by your HSA provider.

Unlike other retirement accounts, HSAs have a triple tax advantage:

  • Advantage one: Money goes into the account tax-free
  • Advantage two: Money earns tax-free interest and investment earnings
  • Advantage three: Money comes out tax-free when used for eligible medical expenses

There are no income limits or required distributions when you reach a certain age.

Many people still view HSAs as spending vehicles or still believe that the funds are “use or lose.” Due to the triple tax advantage and opportunity for long-term health savings, if HSA accountholders can pay minor medical expenses out of pocket, it could be beneficial to let the account balance continue to grow for medical costs in the future. Since HSAs complement other retirement vehicles, people can use an HSA to help build confidence and financial security for the future.

Create an HSA investment plan

Planning is the most critical aspect of a successful transition into retirement. One way to establish a sound financial plan for retirement is to work with a financial advisor. They can help ensure confidence in retirement by planning for all aspects, including the rising cost of healthcare. In addition, a financial advisor can examine individual and unique situations from all angles and help make the transition into retirement successful.

Learn more about UMB Healthcare Services, which has one of the 13 best HSAs for 2023 among all HSA providers.(Source: Investor Business Daily’s Best HSA Companies 2023 List‡)

1All mention of taxes is made in reference to federal tax law. States can choose to follow the federal tax-treatment guidelines for HSAs or establish their own; some states tax HSA contributions. Please check with each state’s tax laws to determine the tax treatment of HSA contributions or consult your tax adviser. Neither UMB Bank n.a., nor its parent, subsidiaries, or affiliates are engaged in rendering tax or legal advice. Withdrawals for non-qualified expenses are subject to income taxes and a possible additional 20% penalty, if you’re under age 65.
UMB Investment Management selects mutual funds in various asset classes for inclusion in the UMB HSA Saver Investment Program. UMB Investment Management and UMB Custody Services are departments of UMB Bank, n.a. UMB Bank, n.a. is a wholly owned subsidiary of UMB Financial Corporation.
UMB Custody Services provides safekeeping and settlement of the mutual fund investments in the UMB HSA Saver® investment program.
All mention of taxes is made in reference to federal tax law. States can choose to follow the federal tax-treatment guidelines for HSAs or establish their own; some states tax HSA contributions. Please check with each state’s tax laws to determine the tax treatment of HSA contributions, or consult your tax adviser.
Neither UMB Bank, n.a., nor its parent, subsidiaries, or affiliates are engaged in rendering tax or legal advice and this document is not intended as tax or legal advice.
Funds in an HSA Deposit Account are held at UMB Bank, n.a., Member FDIC
Investments in securities through HSA investment account are: Not FDIC Insured • May Lose Value No Bank Guarantee
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