Some 36 million Americans hold $116 billion in Health Savings Account (HSA) assets, according to a Devenir study, and financial experts who weighed in on the trend view HSAs as a valuable supplemental retirement savings tool in an era in which medical costs are rising.
The U.S. Centers for Medicare and Medicaid Services (CMS) defines an HSA as a savings account that can be used to pay for qualified medical expenses before and during retirement.
“HSAs can provide a key pool of money to help during retirement, rather than using savings or social security benefits, which are taxed as regular income,” eHealth vice president of consumer enablement Whitney Stidom told NTD in an email.
Medical expenses have been on the rise in the United States for decades.
A Fidelity Investments study found that a 65-year-old can expect to spend an average of $165,000 in health care and medical expenses throughout retirement.
But HSAs offer an avenue to reduce those expenses with several tax benefits, including tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
“This account allows people to save pre-tax dollars for a range of qualified medical expenses, including deductibles, co-insurance, or even massage therapy if it is deemed medically necessary,” Stidom added.
Once funds are accumulated in an HSA, Florida tax attorney, CPA, and business law professor Chad Cummings advises retirees to use those funds to pay medical costs rather than with money drawn from taxable retirement accounts because it may reduce their adjusted gross income.
“This reduction in income can lower the percentage of Social Security benefits subject to federal income tax, ultimately increasing net cash flow,” Cummings told NTD.
Retirees who use an HSA to pay the out-of-pocket expenses that most beneficiaries face on Medicare can do so without incurring any tax liability.
Out-of-pocket expenses that retirees can expect to pay include premiums for Part B and potentially Part D, deductibles for Parts A and B, coinsurance, and costs for services not covered by Medicare like dental, vision, and long-term care, according to the National Council on Aging.
“After reaching age 65, retirees may use HSA funds for non-medical purposes without penalty, though such withdrawals are subject to ordinary income tax—similar to distributions from a traditional IRA,” Cummings added.
The views and opinions expressed are those of the interviewees. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. NTD does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. NTD holds no liability for the accuracy or timeliness of the information provided.