Would you like to reduce taxable income? Would you like to be more prepared for unexpected medical expenses in retirement? Well, you can do both in the run-up to retirement if your employer offers a High-Deductible Health Plan (HDHP).
A High-Deductible Health Plan is a health insurance plan with lower premiums and higher deductibles than a traditional health plan. The minimum deductible to qualify as an HDHP is $1250 for a single and $2300 for a family. Once paid, most in network expenses are fully covered, with the maximum out-of-pocket capped at $6250 for a single and $12,500 for a family. So if you are healthy, you pay lower premiums and may never reach your deductible or out-of-pocket cap. Being covered by an HDHP is a requirement for having a Health Savings Account, and they are usually paired. The funds in the Health Savings Account are used to pay that high deductible. You deposit monies in your account pretax by payroll deduction. And this year, if covered by a family plan, an individual over 55 may defer $7,550 of their income. So for 10 years prior to retirement, you could save $75,500 in a Health Savings Account. Use what you need for your current health care expenses and the balance can continue to grow for unreimbursed health expenses in retirement.
Many assume that it’s smooth sailing once 65 and covered by Medicare. But even with Medicare A, Medicare B, Medicare D, and a Medicare Supplement, there can be additional costs, such as eyeglasses, dental expenses, and hearing aids. It’s a great idea to create a buffer for these expenses and also save on current income tax.
Funds in an HSA can be invested similarly to an IRA. Withdrawals are tax-free for qualified health care expenses. After age 65, withdrawals can be taken for any purpose and are subject to income tax, but no penalty, when not used for health care expenses. Like an IRA, when a person dies, the funds in their HSA are transferred to the named beneficiary, income tax-free if that beneficiary is the surviving spouse.