HSAs Are No-Brainers For These Two Types of People
While HSAs are valuable tools for everyone, there are two types of people who are especially well-suited for them: millennials and individuals who are nearing retirement. If you’re one of those people (or if you’re an employer with employees in either of those groups), keep reading to see why HSAs could be a perfect fit for you.
HDHPs and HSAs: A Quick Review
HSAs are savings and investment accounts used for tax-free payment or reimbursement of qualified medical expenses. Only individuals under qualified high deductible health plans (HDHPs) are eligible to contribute to their HSAs; HSA funds can either be spent on current healthcare costs or invested for future medical expenses. Once accountholders enroll in Medicare, they aren’t eligible to contribute to their HSAs anymore, but they’re free to use the existing funds in their accounts. After age 65, accountholders can use HSA funds for non-medical expenses with no tax penalty; they just have to pay income taxes on the withdrawn funds.
HSAs For Millennials
Younger people, especially if they’re single or married without children, generally require less medical care than older folks with families. Since HDHPs typically have lower monthly premiums than traditional health plans, they’re a natural fit for millennials who don’t see the doctor much. Those premiums savings often more than cover the infrequent out-of-pocket medical costs millennials will incur each year.
With their unparalleled tax advantages, HSAs give millennials an easy way to save even more on medical expenses. By stashing money away in their HSAs, millennials can create a repository of tax-free funds to use for healthcare costs when they incur them. Also, since HSAs have no use-it-or-lose-it limits like FSAs do, millennials don’t have to guess how much medical care they’ll need that year and risk losing what they don’t spend. And because HSAs are portable, millennials can contribute worry-free, knowing the funds will stay with them when they change jobs. They don’t have to spend down the account when moving to a new job, and even if that new job doesn’t have an HDHP option, millennials can still have access to their existing HSA funds.
In addition, millennials have more time before they retire, giving them a great opportunity to take full advantage of the power of compounding interest in their investments. By paying for their medical costs out of pockets and investing their HSA dollars, millennials can start growing medical eggs to cover their healthcare expenses in retirement. The average couple retiring at 65 in 2018 will have to pay $400,000 in retirement medical costs that aren’t covered by Medicare, according to a Healthview study. That sounds like a daunting task. However, if a 22-year-old put $170 into their HSA each month until they were 65 and invested their funds*, they’d have $400,000 in tax-free dollars for their retirement healthcare expenses.
HSAs For Individuals Nearing Retirement
In addition to millennials, individuals nearing retirement are also prime candidates for HDHPs and HSAs. Although folks nearing retirement probably have higher medical expenses to pay for, they’re also more likely to have the out-of-pocket funds necessary to pay for those pre-deductible costs. Also, if these people are already maxing out their 401(k)s and/or IRAs, having an additional savings vehicle for retirement can be invaluable. Contributing to an HSA will provide them with a dedicated savings stream for future healthcare costs, as well as lower their taxable income. And accountholders over age 55 can take advantage of HSAs’ $1,000 annual catch-up contribution, which increases the amount they can put into their HSAs each year.
If they don’t have HSAs, retirees must pay for healthcare costs from other savings sources, which means they’ll have to pay taxes on those expenses. Having an investment HSA allows retirees to pay for medical expenses tax-free and save their 401(k) and IRA funds for other expenses. And if accountholders need their HSA dollars for non-medical costs, the funds can be withdrawn without any tax penalty after age 65. Before accountholders turn 65, withdrawals for non-medical costs face a 20% tax penalty in addition to income taxes, but after they turn 65, they only have to pay income taxes on those funds. In addition, since HSAs have no required minimum distributions, accountholders don’t have to withdraw funds until they need them, unlike 401(k)s and IRAs.
If you’re a millennial, HSAs give you the ability to turn your less-frequent medical needs into savings. And for individuals nearing retirement, HSAs are a dedicated savings vehicle to ensure a financially secure retirement. Ready to get started?