Most people know that saving for retirement is important. Many invest in their employer’s 401(k) plan, mutual funds, or other savings vehicles with the hope of having enough money to carry them through their golden years until death. We all know we will need money for shelter, food, transportation, daily living expenses, and, hopefully, a little fun. However, one thing often overlooked when planning for retirement is healthcare.

Medical Care and Retirement

Medical care is one of the largest expenses seniors will incur during their retirement years. As people get older, it’s more common to experience more chronic diseases, such as diabetes, heart disease, and cancer. These diseases require ongoing care and treatment and can be financially detrimental to a retiree. Seniors may also endure a great deal of stress, due to concerns that they may not have enough retirement income to fund such costly medical expenses.

The Benefits of an HSA

Investing in your employer’s 401(k) plan is always a must, however, your employer may also offer another savings tool that is often overlooked when planning for retirement. The HSA (Health Savings Account) can be a vital component in reaching retirement goals. The HSA is a medical savings account that is paired with a High-Deductible Health Insurance Plan (HDHP). Contributions to an HSA may be made by the employee and their employer, and the contributions are tax-free. Funds may be used for payment of medical care incurred by the account holder and dependents. HSA funds can be invested in stocks, bonds, and other investment funds to encourage further fund growth, and earnings are also tax-free. Additionally, unspent funds in an HSA rollover and grow from year to year. The HSA belongs to the employee, and if the employee’s employment ends, the HSA goes with them.

What Services You Can Utilize Under HSA Funds

The average American spends $5,000 out-of-pocket every year for healthcare costs, according to the Bureau of Labor Statistics. Below, we list eight categories of HSA-approved services and items that can help reduce employee stress during these uncertain times, in an effort to optimize your HSA dollars. We also recommend visiting HealthEquity for a full list of qualified medical expenses set by the IRS.

  1. Telehealth (mental health and primary care) – Depending on your mental health provider’s network, services aren’t always covered under the health plans. However, employees can use their HSA dollars to cover them. Additionally, telehealth makes it easy to access care during the pandemic and when employees need it.
  2. Alternative therapies – HSA dollars can be used for chiropractic visits, acupuncture, massage therapy and even yoga — with a doctor’s note explaining that the services are medically necessary. Be sure to keep the note in the event your HSA is audited, and you are asked to prove that a medical professional made the recommendation.
  3. Sleep aids – Many people aren’t sleeping well right now because they’re stressed about the pandemic. You can buy melatonin, nasal strips, a dental guard (for teeth grinding), and other sleep aids with your HSA dollars.
  4. Drugs and medicine – Use your HSA funds for over-the-counter medicines such as fever-reducing medications, allergy medicine, antacids, and more. Immunizations and vaccines can also be covered by HSA dollars.
  5. Personal care – Many people are unaware that you can use your HSA to purchase your everyday personal care items. A few examples are Chapstick, sunscreen, menstrual care products (tampons, pads, liners, cups, sponges and similar items), menstrual pain relievers, Viagra, condoms, pregnancy test kits, and blood pressure monitoring devices.
  6. Baby expenses – Certain items for your baby can be covered by your HSA. These items include diaper rash ointments and creams, breast pumps, obstetrical expenses, lactation consultants, midwife services, toothache and teething pain relievers, thermometers, etc.
  7. Eye care – Items covered by your HSA for eye care can include laser eye surgery (Lasik), eye examinations, eyeglasses, optometrist visits, and contact lenses (including materials and equipment).
  8. COBRA expenses – For those people who are losing their jobs due to the pandemic and are receiving healthcare benefits from COBRA, they can use their HSA dollars to help with these payments.

HSAs and Retirement

How does this help with retirement? An employee who consistently contributes to their HSA account and manages the spending from that account may find that they have a significant balance after several years. If the account holder is relatively healthy and requires minimum medical care, the account balance will continue to flourish. The HSA remains with the employee upon retirement, and, at age 65, the funds in the account may also be spent on non-medical expenses; however, the funds will be taxed as income for those non-medical expenses, but never for qualified medical expenses. HSA funds can also be used for the payment of Medicare and long-term care premiums.

A well-funded, tax-free HSA account can eliminate the need to use taxable 401(k) savings for medical care. This can be welcomed relief to many retirees, as most wish to use their retirement savings for living and enjoyment. Contributing to an available HSA over the long term should be given as much consideration as contributing to a 401(k) plan.

Connect with our team today to learn more about how we can help you navigate the differences between 401(k) plans, HSAs, and retirement plans.