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 When that money is withdrawn in retirement, those contributions are taxed at the standard income tax rate.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.