In the practice area of Elder Law we often deal with how to pay for the medical costs of our clients. Most of the time people do not call until they are facing a $6,000.00 a month bill from the nursing home. Most people spend a large amount of money on healthcare before they ever enter a nursing home. Although some people accrue enough savings to meet their basic needs, health costs – which tend to rise after retirement – remain a major concern. A recent MarketWatch analysis found that most retirees will spend an average of $250,000 on out-of-pocket health costs during their retirement years, an amount that can quickly cut into their savings.
Health savings accounts (HSAs) offer people a way to save for these costs now and into retirement years. Health savings accounts were introduced just over 10 years ago, many years after flexible spending accounts (FSAs), which you use to pay medical bills each year. Many people confuse the features. FSAs were designed as a way to manage predictable health-care expenses within a given year. HSAs are designed to be a powerful short and long term savings vehicle.
HSAs are individual accounts, just like personal checking and savings accounts. As such, they are portable – the account and the contributions in it remain the property of the account holder, even if he or she changes jobs or enrolls in a different health insurance plan. You can continue to contribute up to the allowable IRS limit, as long as they are enrolled in qualifying high deductible health plans. The funds roll over from year to year with no expiration.
Best of all, HSA contributions are triple-tax-advantaged. Contributions are tax free. Once HSA account balances reach a minimum threshold, funds can be invested, with interest and earnings on investments tax free. And HSA account holders do not pay income tax on funds when they withdraw the money for qualified health-care expenses, as they do with the money in their 401Ks. All of these features make HSAs an attractive way of managing near term health-care spending and saving for health-care costs through retirement.