Health Savings Account – A Multi-Use Savings Vehicle

Healthcare costs are estimated to be one of the largest expenses for individuals in retirement. Not only are there ongoing concerns about Medicare funding, but what does this program actually cover? How much do supplemental plans cost? When there is a gap in coverage, how does a retiree plan for those variable expense associated with healthcare? Is there a way to pay for today’s costs while also saving for future healthcare needs?

These are a number of questions we hear from individuals and families.  As the healthcare landscape continues to change (most notably higher expenses being passed along to the insured), the more employers are offering High Deductible Healthcare Plans as options to their employees. When an employee signs up for this type of healthcare plan, the availability of a Health Savings account (HSA) can become a viable tool to not only offset healthcare costs today but also provide flexibility with retirement planning.

To understand the basics of a Health Savings Account, let’s start with the benefits of this type of plan. Health Savings accounts are currently triple tax advantaged. This means that the employee receives a tax deduction for the contribution made to the account. Second, all growth inside the account is then tax-deferred. Third, if funds are used for qualified healthcare expenses, those withdrawals would be 100% tax-free. In addition to the tax benefits associated with this account, all unused funds can be rolled over annually, thereby allowing a participant to use this account to save for future healthcare expenses.

Health Savings Accounts have annual contribution limits. For 2022, the IRS contribution limits for an HSA is $3,650 for individual coverage and $7,300 for family coverage. For 2023, the IRS contribution limits for and HSA are $3,850 for individual coverage and $7,750 for family coverage, respectively. In addition to these limits, when an individual reaches age 55, they are eligible to make an annual catch-up contribution of an additional $1,000.

Once the contributions are made, an individual can consider investing those dollars. Typically, most HSAs require a specific dollar amount to be in cash, usually $1,000-$2,000 to account for short-term expenses. As contributions continue to be made and this minimum is met, consider investing future contributions by choosing an allocation that fits your goals and time horizon. This is where working with your advisory team can help determine how to best utilize this vehicle for maximum benefit.

In addition to the tax benefits of HSA’s, saving these dollars for retirement healthcare expenses can cover a number of items. First, for individuals who retire prior to age 65, it can help bridge the gap between retirement and Medicare eligibility. While an HSA cannot be used to pay most health insurance premiums, it can be used to pay for out-of-pocket expenses not covered by healthcare. Second, once age 65 is attained, you can use an HSA to pay for premiums on Part B and Part D Medicare coverages (although you cannot use this vehicle to pay for Medigap policy premiums).

In summary, when looking to utilize this type of planning vehicle, the ability to save funds today can help offset future healthcare costs not only during your working years, but also in retirement when healthcare typically becomes even more of a concern.

Cleveland Wealth, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.