According to the Kaiser Family Foundation, in 2024, 27% of employees nationwide were enrolled in High Deductible Health Plans (HDHP) through their employers (not far off the 29% enrolled in 2023). [1].
An HSA is a tax-advantaged medical savings account available to participants in a HDHP. In 2024, if your HDHP deductible is at least $1,600 for an individual or $3,200 for a family, you can open an HSA and contribute $4,150 per year for an individual or $8,300 per year for a family. If you are 55 or older a “catch up provision” of an extra $1,000 per year applies. An HSA has other benefits that are similar to a retirement plan including the following:
Once you have decided to open and fund an HSA, spend some time researching the providers. Compare their monthly account fees and transaction costs and determine whether or not they offer investment options. Some providers offer low-cost investment choices through mutual funds as well as an FDIC insured cash component. Next, you need to determine if you can invest some or all of the funds that are accumulating in the HSA.
Fidelity Investments estimates that on average a 65-year-old retired couple needs over $300,000 to spend on health care over the course of retirement. This figure alone makes a good argument for investing at least a portion of the HSA account balance, provided you have enough cash to cover unexpected medical expenses.
You don’t want to liquidate investments to cover near-term medical expenses if the market has taken a turn for the worse.
Another important reason to take the long view with your HSA; the ability to use the account to pay your Medicare premiums. Once you are retired, you can withdraw from the HSA, tax-free, to pay for Medicare Part B and Part D premiums. Additionally, you don’t need to be concerned about access to the balance in the HSA, and paying a penalty to withdraw your money, because in retirement non-health related withdrawals are treated as ordinary income without penalty.
At a minimum, the HSA is a tax-advantaged tool to pay annual medical expenses, but if it is feasible to pay medical expenses from cash flow, the funds that accumulate in the HSA can have great benefits during retirement. There are a lot of benefits to funding an HSA. Talk to your financial advisor to see if you qualify and if it’s right for you.
[1] https://www.kff.org/report-section/ehbs-2024-section-8-high-deductible-health-plans-with-savings-option/
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