by Dave Kutcher
While most of us think of a Health Savings Account (HSA) for what it was primarily designed to do, provide a tax-advantaged way to save money in order to pay for ongoing medical expenses in the near-term, the rules surrounding HAS’s allow us to pre-fund future medical costs with tax-free dollars., including those dollars that come from the interest earnings on the HSA over time.
Folks with high-deductible health insurance plans can put money into an HSA on a pre-tax basis like an IRA contribution. The account grows tax free, and any funds withdrawn for qualifying medical expenses comes out of the plan tax free.
As we have written here many, many times, one of the biggest risks facing seniors during retirement is the rising cost of health care. Planning for ways to most efficiently pay for those expenses simply makes sense and allows for more usable/spendable retirement income for things you enjoy, not for health care.
We have estimated an average need after age 65 of around $180,000 if someone is to provide some reassurance for themselves that they will be able to cover their medical costs during retirement. This does not count high prescription use retirees who could see that number close to $400,000 during retirement. It just makes sense to be able to pay for these expenses with tax free dollars than the alternative. In this way, interest/earnings on your HSA money, over your pre-retirement time in the workforce is growing tax free and will be available to you tax free to pay these expenses during your retirement.
Obviously, to make this work, you must leave some money in the account or, in other words, fund it annually with more money than you need to cover short term medical bills today. The idea is to have excess funds accumulating on a tax-preferenced basis as well as providing a current income tax deduction for the contribution you make in any tax year.
Maximum contributions in 2024 are $4,150 for individuals and up to $8,300 for a family. These maximums are indexed moving forward and will be slightly higher for 2025. Older contributors can add another $1,000 in each between age 55 and age 65. You cannot contribute to an HSA once you are eligible for Medicare at age 65.
While you are able to access your money for other than medical expense reimbursement, any such distributions are considered taxable events. Employing this strategy works best when we save all of our medical receipts and bills that were paid out of current income during pre-retirement and using those receipts and expenses as our way to withdraw tax free income as reimbursement for the expense years later. There is NO time limit on when we can pay for the expense via the HSA account.
Considering the rising costs of everything, finding resources that make things more efficient and less costly during retirement are always key to our planning strategies. Speak to your accountant today about the viability of using an HSA account for you and your family.
My name is David A. Kutcher, a retired Marine Corp Captain. My business partner in the lower 48 is Richard C. Scott, CLU, LUTCF. For nearly 40 years we have been helping folks with their personal retirement decisions. You can catch us on the radio every Saturday morning, “Retirement in the Last Frontier”, 8:30-9:30 on AM 650, Keni Radio and on Tuesday mornings, KFQD News Talk Radio AM 750 and FM 103.7. Frontier Retirement, 10928 Eagle River Road; Eagle River, AK 99577, (907) 795-7452.
