The average couple retiring today at the age of 65 will need close to a whopping $300,000 to cover health care and medical expenses in retirement, according to an estimate by Fidelity, assuming lifespans of 87 (male) and 89 (female).
A Health Savings Account, or HSA, is a unique, tax-advantaged account that can be used to pay for current or future healthcare expenses.
If you are enrolled in a high-deductible health insurance plan (HDHP) you can qualify for an HSA. These plans are re-visited each year by the IRS, who determines the minimum deductible they must have and the maximum amount a plan-holder can spend out-of-pocket.
While the intention of the plan is to accumulate savings for medical expenses the savings can be used for general expenses after the age of 65 making it an attractive retirement savings options especially since there are no income limitations unlike an IRA or a Roth IRA.
HSA Contribution Limits for 2020:
HSA allows you to set aside funds for future medical expenses. The new limits for health savings accounts (HSA) for 2020 are going up $50 for individual coverage and $100 for family coverage. The catch-up contribution limit for those over age 55 will remain at $1,000.
Annual contribution limits: For calendar year 2020, the annual limit for HSA savings for an individual with self coverage is $3,550 and for an individual with family coverage it is $7,100.
High deductible health plan: For calendar year 2020, a HDHP is defined as a health plan with an annual deductible that is not less than $1,400 for self coverage or $2,800 for family coverage.
The annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) also should not exceed $6,900 for self coverage or $13,800 for family coverage.
HSA Plans in Numbers
|Maximum Out of Pocket|
HSA offers Multiple Tax Benefits:
- Contributions are tax deductible: Similar to a 401(k), one can contribute pre-tax dollars to a HSA, which reduces your taxable income for the year.
- Earnings grow tax-free: Another benefit of HSAs is that the contributions can be invested in mutual funds, stocks and other investment tools. There are various companies that can help you do this, depending on your investing preferences.
- You can withdraw money tax-free: If it’s used for qualified medical expenses. You can find a list of these expenses on the IRS’s website.
- Unlocks after 65: Up until the age of 65 the HSA account can only be used to pay towards medical expenses. After the age of 65, funds can be withdrawn for any purpose without penalty, but may be subject to income tax if not used for IRS-qualified medical expenses.
Your HSA Rolls over Annually
The great thing about an HSA is that it stays with you. So if you get a new job or health plan, you keep your HSA. You can roll the account into your new employer’s plan or leave it alone. Either way, those funds are yours to use for qualified expenses.3