When you are planning for retirement, you have to also factor in healthcare costs. The current projections for today’s couples is in excess of $275,000 for average retirement healthcare expenses. This is on top of Medicare benefits.
With this in mind, those on top of their finances and retirement plans are investing in Health Savings Accounts (HSAs). Like other forms of retirement savings, these allow for tax deductible contributions now in order to cover future health costs. To learn more about HSA investment options and to determine what’s right for your retirement, consult with your financial planner.
In this article, we want to talk about how to manage your HSA balance as you are saving money to the HSA. This is something we’ve been helping a number of Illumination Wealth clients with lately. It’s important to know how and when to use HSA funds for qualified medical expenses because there are ways to make them go further. In addition, it’s smart to have a plan ready for when you end up with excess HSA funds.
When you have a qualified medical expense that you can use your HSA for, you essentially have four options on how to deal with the payment:
1. You can pay for the medical expenses using your available HSA cash balance.
2. You can pay for the expenses out-of-pocket and reimburse yourself at a later date from your HSA cash balance.
3. You can sell your HSA investments to fund your out-of-pocket medical costs. In other words, not every bit of money in your HSA will be liquid as a certain amount will be tied up in investments versus some available directly as a cash balance. In this situation, you will sell off an HSA investment and transfer it into your cash balance for withdrawal.
4. Last but not least, you can consider paying for your medical expenses out-of-pocket if you have the means. This allows you to hold on to your HSA funds for future use while continuing to let the investments gain in value.
At Illumination Wealth, we strongly recommend that our clients follow option #4 whenever possible because it offers the best long-term value. When you have emergency funds available and enough cash flow to pay your medical expenses out-of-pocket, it’s best to hold onto your HSA investments (and keep reinvesting). Your HSA balance can grow faster with compound earnings and no taxes to pay, and you’ll have more money in the future to pay for new medical costs or even reimburse yourself for older expenses.
You should always save your medical expense receipts because you can use them in the future to take money out of your HSA, not pay tax, and use that money for whatever you want. And if you wind up with extra HSA funds, you can withdraw them for any purpose after age 65 as a taxable distribution. What it boils down to is if you already have the money to cover your own retirement medical expenses, don’t pull from your HSA until you absolutely need it. You’ll be so much better off in the long run.
Managing Health Savings Accounts is just one component of a successful retirement plan. Whether you plan to retire early or it’s a long ways off, it’s important to understand how HSAs work and how to make the most of them for your future health and wealth.
To learn more or to get your own retirement savings plan in order, contact Illumination Wealth today for a personal financial consultation.