It’s no secret that health care costs are on the rise, and many older Americans aren’t prepared when it comes to paying for medical costs in retirement. In fact, 40% of Americans aren’t setting aside funds for future health care costs. That’s scary stuff when you consider that a healthy 65-year-old couple will likely need more than $537,000 to cover health care costs in retirement.
In my last post, I talked about how properly navigating a health savings account (HSA), as well as Medicare and Social Security, can help individuals plan for retirement. But it’s also important to keep in mind how an individual retirement account (IRA), in conjunction with an HSA, folds into a well-rounded retirement strategy.
If you’re a registered investment advisor coaching clients who have retirement on the brain, you can encourage employees to leverage their HSA in a greater capacity to save for those inevitable medical costs later down the line. This post will do a deep dive into IRAs and HSAs, so your clients can build up their health to wealth strategy and be prepared for retirement.
A Brief Overview: IRAs and HSAs
IRAs have been around since the 1970s, when they were introduced in the Employee Retirement Income Security Act of 1974. These accounts were designed to allow employees to make contributions into a portable retirement account, outside of their employer. With this IRA option—now known as a Traditional IRA—employee contributions are tax-deductible for both federal and state taxes in the year a person makes the contribution. When that money is withdrawn in retirement, those contributions are taxed at the standard income tax rate. In 1997, the Roth IRA was introduced, allowing employees to pay taxes on the front end when they contribute to the account. The earnings and withdrawals, however, are generally tax-free (depending on the age of account holder when they make a withdrawal, if a beneficiary has to pay estate taxes, etc. You can see more about that here.)
What many people don’t realize is that an HSA can act as a “medical IRA” to help save and pay for those (ever-rising) medical costs later down the line. HSAs were born in 2003 as part of the Medicare Prescription Drug, Improvement and Modernization Act. These accounts are tied to high-deductible health plans (HDHPs) and allow employees to set money aside before taxes to pay for qualifying medical expenses. What’s more, these account contributions roll over year after year and allow employees to reinvest their earnings—similar to an IRA—so they can build a solid nest egg to pay for medical expenses…or other retirement costs if they so choose.
The beauty of the HSA is that this is the only account in the IRS tax code that truly offers triple tax savings:
Contributions are tax deductible, reducing the money a person owes on federal income taxes.
These contributions grow tax-free at the federal level.
Funds can be withdrawn to pay for qualified medical expenses.
The Rollover: Where IRAs and HSAs Meet
Has your client started to build a medical savings fund for their retirement? If your client has an IRA, and is eligible for an HSA, the good news is that they can kickstart building that nest egg right away. In 2006, the Health Opportunity Patient Empowerment Act was enacted to allow individuals to make a one-time, penalty-free and tax-free rollover from their IRA to their HSA (if, of course, the individual was eligible for an HSA). This allows the individual to start filling up their HSA to start paying for medical care, tax free. A couple of things to keep in mind: The maximum amount a person can contribute to the HSA must align with the HSA contribution limits for that year. So, if your client does roll over the max HSA limit for the year from their IRA, that’s all they can contribute to their HSA for that year.
Don’t Delay, Start Saving!
When your clients make the most of an HSA account, they’re not just setting aside cash for future medical expenses; they’re building on a health to wealth strategy, chock full of tax-advantaged benefits, that may leave them some extra money to enjoy during retirement too. Stay tuned for more blog updates in the coming weeks designed to help your clients prepare for retirement.
Want to pass along more information to your clients about the retirement benefits of contributing to an HSA?
Check out our Tale of Two Employees guide, with an easy-to-follow overview of how two different savers reaped big rewards by contributing to their HSA over the years.
Author: Juan Godina is a health care banking and insurance service professional with two decades of experience. He has helped thousands of individuals figure out the rules of the road with HSAs, Medicare, and Social Security. He enjoys educating consumers about the benefits of HSAs and how to maximize their triple tax benefits, rounding out their understanding of their High Deductible Health Plan insurance. His background in health care banking, insurance regulations and technology provide a holistic perspective into consumer-driven health care for individuals, families, and businesses.