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Scott Neal

Scott Neal, CPA, CFP, is the president of D. Scott Neal, Inc., a fee-only financial planning and investment advisory firm with offices in Lexington and Louisville. Reach him at or by calling 1.800.344.9098.

Rethinking HSAs and Retirement Planning

LEXINGTON Perhaps you have seen the articles stating the rule-of-thumb that a 65-year-old healthy couple can expect to spend about $250,000 on healthcare over the course of their retirement. Fidelity pegs the amount at $275,000. While that may be true for some folks, it is only a guide, at best. There are so many variables in that analysis that it makes such a general statement somewhat worthless for most people. I suggest that we take a little different approach to planning healthcare expenses throughout retirement.

I daresay that most of you would agree with the assumption that health care costs will continue throughout one’s lifetime, will remain a relatively high priority, and are likely to increase as we age. So, while it may be disingenuous to express the future cost as a lump sum needed at age 65, it is safe to say that choices will generally be made to pay for healthcare for as long as we live and will be covered at the expense of other items in the budget. One way to plan is to utilize a health savings account (HSA).

Health Savings Account Basics

Simply put, an HSA is a tax-favored savings account. Yearly contributions are tax-deductible up to the full annual limit (in 2018 the limits are $3,450 for individuals and $6,850 for families, plus an additional $1,000 for those who reach age 55 by the end of the year). Note that the contribution limit was reduced in March of this year from $6,900 for family coverage. Unlike medical savings accounts or flexible spending accounts, the money doesn’t have to be used to get the deduction, and any that is left in the account can be invested. Unlike retirement accounts, it is not taxed on withdrawal but only taxed if not used for qualifying medical expenses. By the way, eligibility for the entire year is determined on the first day of the last month of your tax year, usually December 1. That means if you don’t now have an HSA, there may be time to establish one for this year.

A workplace-sponsored health plan isn’t necessary to set up an HSA. The only requirement is a qualifying high deductible medical insurance plan (HDHP). To be considered an HDHP in 2018, the plan must have a deductible of at least $1,350 for self-only coverage and $2,700 for family coverage. Additionally, the maximum annual out-of-pocket expenses allowed under the plan, including the deductible, are $6,650 for self-only coverage and $13,300 for family coverage. These amounts are indexed to inflation and therefore change each year.

Several institutions offer HSA accounts and, in many cases, can be linked to a brokerage account and invested just like any other investment account. Importantly, the money put into the account can be transferred to another HSA. For example, if a spouse is named beneficiary on an account, the money can be transferred on death to the surviving spouse’s HSA.

As noted above, if the funds are used to pay qualifying medical expenses, the withdrawals are not taxed. Medical expenses that qualify are generally those that would otherwise be deductible as itemized deductions. However, health insurance premiums are not qualified medical expenses unless they are for long-term care insurance, COBRA continuation coverage, health coverage during unemployment, or Medicare. If money is taken out but not used for qualifying medical expenses, it would be taxable as income in the year withdrawn and can incur a 20% penalty until age 65 unless an exception applies.

HSAs and Medicare

No further contributions can be made to an HSA after enrollment in Medicare. Funds can continue to be used to pay for medical expenses, including premiums for Medicare Part B and D and supplemental plans. Deciding to wait to enroll in Medicare to take advantage of putting money into an HSA means that Social Security benefits will have to be delayed as well. Receiving Social Security benefits means automatic enrollment in Medicare Part A hospital coverage, which precludes contributions to the HSA.

A taxpayer can save on FICA taxes by funding an HSA with pre-tax salary deferrals (if available through the employer’s cafeteria plan).

Another Way to Save for Retirement

If you agree that health care expenses are going to remain a high priority expenditure throughout retirement, stop and think about how to implement this plan. Even before making the maximum contributions to 401(k) and IRA plans, an HSA should be considered as a viable form of saving and investment. Obtain the tax deduction for the contribution. If possible, pay for current routine medical care out of your annual cash flow. Don’t touch money in an HSA. Let it grow tax-free. And then spend it, tax-free, to pay those rising costs throughout retirement. Saving here will also reduce the required minimum distributions from qualified retirement accounts.

Scott Neal is president of D. Scott Neal, Inc., a fee-only financial planning and investment advisory firm with offices in Lexington and Louisville. Contact him at or visit his blog at