Medicare has been a key tool for helping retirees mitigate healthcare costs, but many still have to pay a substantial sum from their own pockets. As such, you may consider supplementing your Medicare benefits with a health savings account (HSA). According to the Center for Retirement Research at Boston College, Americans age 65 and older are still paying, on average and after Medicare, $4,300 for medical expenses every year. It may behoove us to remember these expenses as we manage our self-directed investments and plan for our futures. An HSA can be a valuable tool in doing so.
HSAs are individual custodial accounts that allow you to invest in the same alternative investment options as self-directed IRAs. Instead of building your overall nest egg, you’re growing a pool of cash and assets that you may use to address qualified medical expenses (QMEs) in the near and long terms. You must be enrolled in a high-deductible health plan (HDHP) to open an HSA, but the deductible is a QME and may therefore be covered by HSA funds.
You may deduct HSA contributions from your income for an immediate tax benefit just as you could with a Traditional IRA. Single HDHP participants may contribute up to $3,450 per year in 2018, while family HDHP participants may contribute up to $6,850. HSA holders may contribute an additional $1,000 per year if they’re age 55 or above. So, as a single HDHP holder below the age of 55, our example investor could earn $75,000 in a given year but only pay taxes on $71,550 by making a $3,450 contribution to her HSA.
HSA contributions could make for happier tax returns, but the true beauty of HSA investing lies in their withdrawals. HSA distributions can be 100% tax-free regardless of your age if they either cover QMEs or reimburse you for QMEs you have already paid out of pocket (only if they were incurred after you opened the HSA). If we continue with our previous example, let’s say our single HDHP holder makes her $3,450 contribution and grows her balance to $5,000 through savvy investments. She then sustains an unfortunate injury and needs that $5,000 to help pay her hospital charges. She can withdraw the full $5,000 balance without paying any taxes as long as she addresses her QMEs with it.
In many ways, HSAs combine the most favorable elements of other self-directed retirement plans. You can enjoy recurring annual benefits by making tax-deferred contributions and the long-term benefit of tax-free withdrawals. Essentially, HSAs enable you to cover medical expenses with money that has not been taxed.
This may seem too good to be true and you may believe the list of QMEs would be full of obscure medical occurrences that you’re unlikely to ever experience, but that’s not the case. Annual physicals, prescriptions drugs, and eye care (exams, contact lenses, glasses) are among the many QMEs that an HSA can help pay for.
As the Boston College article highlights, Medicare will only go so far once you reach retirement age. As such, you may want to think about whether or not a self-directed HSA could be right for you. For more information about HSAs or alternative IRA assets, please don’t hesitate to contact New Direction IRA at 877-742-1270 or firstname.lastname@example.org.