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Retirement can be a financially precarious time for a lot of people. Between housing, food, utilities, and transportation, the cost of living can be a lot to bear, even for those with income outside of Social Security.
But if there’s one expense that tends to catch retirees off-guard, it’s healthcare. As people age, health issues tend to emerge. And the cost of Medicare itself can be a burden for those who aren’t loaded with cash.
However, it’s not Medicare premiums costs that current enrollees are most worried about. In a recent eHealth survey, 75% pointed to out-of-pocket costs as their greatest concern, compared to 45% who cited monthly premiums as a point of worry.
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If you’re not yet retired but are worried about affording healthcare costs under Medicare down the line, it pays to set funds aside expressly for medical care. And there’s one account to turn to in that regard.
It pays to fund an HSA
You could always pad your 401(k) or IRA to allow for extra healthcare spending. But if you’re eligible to contribute to a health savings account, or HSA, then that might be an even bet in the context of saving for medical care.
The reason? HSAs are triple tax-advantaged. With an HSA, your contributions are tax-free, investment gains are tax-free, and withdrawals are tax-free when spent on medical expenses. Other tax-advantaged retirement plans might offer you one or two of those benefits, but not all three.
Take Roth 401(k)s and IRAs, for example. They do give you tax-free investment gains and withdrawals. But you don’t get tax-free contributions like you would in an HSA.
Meanwhile, traditional 401(k)s and IRA do give you a tax break on your contributions. But gains are tax-deferred, which means you pay taxes eventually. And withdrawals are taxable as well.
Of course, not everyone is eligible to fund an HSA. To do so, you must be enrolled in a high-deductible health insurance plan. But if your coverage is HSA-compatible, then it pays to get as close as you can to maxing out your HSA. Not only that, but you should pledge to leave your HSA funds alone year after year and carry that money into retirement, when you might end up needing it the most.
How HSAs work with Medicare
Once you enroll in Medicare, you can no longer contribute money to an HSA. But the funds you already have in your account can be spent on Medicare expenses, like premiums. You can also use your HSA funds to cover services Medicare won’t pay for, like eye exams and dental care.
It’s a big misconception that healthcare under Medicare is affordable. For many people, it’s not. But a good way to ease that burden is to save money specifically for medical spending.
Granted, you could always tap your IRA or 401(k) when healthcare bills arise. But you might feel a whole lot better about having a dedicated source of healthcare funds when you’re older and on more of a fixed income.
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