Many experts expect healthcare costs will continue to rise, making it important that advisors help their clients plan ahead.
According to the Kaiser Family Foundation, health care has become somewhat less affordable, even among those with health insurance. Since 2015, larger shares of people with health insurance say they have a difficult time affording their healthcare costs: from 27% to 37% for premiums; 34% to 43% for deductibles; and from 24% to 31% for copays and prescription drugs.
Some experts estimate that a 65-year-old couple who retired in 2016 will need $260,000 to cover just healthcare costs in their golden years—6% more than the previous year's estimate of $245,000. That’s the highest estimate since such projections started in 2002, and chances are repealing and replacing the Affordable Care Act, not to mention the high cost of pharmaceuticals, could push retiree healthcare costs even higher. All of which highlights the need for advisors to discuss with clients the flexibility and power of Health Savings Accounts (HSAs).
Read on for a summary of their analysis, or view the entire document here.
HSAs and Retirement Planning
- HSAs were created with the passage of the Medicare Modernization Act in 2003. Although available more than a decade, HSAs are growing in popularity with both employers and employees. Why? An HSA offers an opportunity to pay medical expenses in retirement tax free. Distributions can be made at any time (unlike flexible spending accounts, which follow “use it or lose it” distribution rules), which, with smart planning, offers a younger individual to fund his or her HSA today and let the account grow without distributing any proceeds until later in life, potentially as late as retirement.
- In fact, HSAs are triple tax-advantaged, which means that contributions are tax deductible, distributions (of contributions) are tax free, and earnings are distributed tax free so long as the proceeds are used to cover qualified medical expenses. HSAs also can enable employers to lower premiums by creating higher deductibles and increase “cost sharing” with employees.
- While a distribution from an HSA is generally subject to a 20% penalty if the proceeds are not used for qualified medical expenses, the penalty is waived for those individuals age 65 and older who used their HSA for nonqualified medical expenses. But such a distribution is subject to income taxes.
For additional details, including contribution limits and how to coordinate an HSA with an IRA, read the complete article from Lord Abbett. You can also contact us to learn more about Lord Abbett and Company, LLC, other Money Managers, or to consult with a Wealth Manager to learn whether or not your retirement plan is on track. Give us a call at 1-800-541-7774 or email us.
