​Do you have a strategy to pay out-of-pocket medical costs in retirement? If not, now may be the time to start planning.

According to Fidelity, the average retired couple will spend nearly $260,000 on out-of-pocket health care costs.1 Those costs are for things like deductibles, copays, prescription drugs, premiums and much more. It doesn’t include costs for long-term care, which could significantly increase your health care expenses.

Many retirees incorrectly believe that Medicare will cover all their medical costs in retirement. The truth is that Medicare usually covers only a portion of your expenses. Some types of care aren’t covered at all. That means many retirees face sizable bills that they must pay out of pocket.

A health care funding strategy can help you prepare for these expenses and prevent them from derailing your retirement. A health savings account (HSA) could be an important element in your retirement funding plan.

HSAs are accounts used specifically to save for health care expenses. You can contribute to your HSA straight from your paycheck and then invest the funds according to your goals and risk tolerance. When you have health care costs, you can simply use your HSA to pay the bill or to reimburse yourself for the expense.

Still not sold on using an HSA as part of your retirement strategy? Below are a few reasons why an HSA could be an important funding tool for you:

Tax Efficiency
HSAs offer a level of tax efficiency, making them powerful savings tools. The tax efficiency starts with your contributions. Your contributions are made pre-tax, similar to contributions to a 401(k). That pre-tax treatment acts as tax deduction because it reduces your taxable income.

Once your contributions are in the plan, you can choose from a menu of investment and saving options. Most HSAs offer a wide range of choices to meet levels of risk tolerance. No matter how you choose to invest your funds, the money will grow tax-deferred as long as it stays inside the account.

Finally, you also experience tax efficiency on the backend of the HSA. When you take distributions from the plan, those distributions are tax-free as long as the money is used for a qualifying medical expense. If the money is used for a nonqualified expense, you could face taxes and early distribution penalties if you’re under age 59½. As long as you use the money for health care, however, your HSA can be a tax-efficient savings vehicle for medical expenses.

Accumulation Potential
Many people assume that an HSA has a “use it or lose it” feature that requires them to use the money in a specific calendar year. The truth is your HSA balance can carry over from year to year, allowing the funds to grow and compound over an extended period of time.

Also, your HSA balance isn’t tied to your job. Although your contributions may come out of your paycheck, you keep your balance with you when you leave your employer. You can keep contributing to your HSA at each job you have and even after you retire.

It’s true that HSA distributions must be used for qualified medical expenses. However, the IRS has a very broad definition of what constitutes a qualified expense. Nearly any payment to a medical services provider, such as a doctor or hospital, qualifies. Copays for prescriptions and other services qualify. Even payments for medical supplies can qualify as a medical expense.

You could also use your HSA to pay for long-term care costs. For instance, you may need to pay a home health aide to come to your house and assist with basic tasks. Or you may need to modify your home to accommodate a wheelchair. You could use your HSA funds to pay those costs.

Ready to develop your retirement health care funding strategy? Let’s talk about it. Contact us today at Master Plan Retirement Consultants. We can help you analyze your needs and create a plan. Let’s connect soon and start the conversation.

Master Plan Retirement Consultants proudly serves the financial needs of those in the metro Atlanta, Georgia.


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Investment advisory services offered through MasterPlan Retirement Consultants, Inc. a Registered Investment Advisor in the state of Georgia. Insurance products & services offered through Fricks and Associates, Inc. MasterPlan Retirement Consultants, Inc. & Fricks and Associates, Inc are affiliated companies.
MasterPlan Retirement Consultants, Inc. & Fricks and Associates, Inc are not affiliated with or endorsed by the Social Security Administration or any government agency.

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