Last week I offered a few tips on how to balance your financial priorities by capitalizing on the down days of summer. One of the four suggestions addressed savings and how automatic pay deductions serve as an avenue to turn a blind eye to what we so often fall short in; paying ourselves first. Paying yourself first is a critical step in beginning to build, in the shortest run, an emergency fund and in the longest term, saving for retirement.
However, there are many of us who may be chanting, been there done than…we got the t-shirt and the hat. And if you are a Keeper that has already built up an emergency fund, typically recommended by financial experts anywhere from 3 to 9 months of expenses, and maxed out on your 401(k) or 403(b) plan contributions, you don’t have to look far for yet another growth opportunity in securing your nest eggs. Believe it or not, this opportunity is fully accessible and right under our noses… in your health-care plans.
Health Savings Accounts (HSAs) are tax-free financial accounts, established in federal law in 2003 that are designed to help individuals save for future health care expenses. The average couple retiring today at age 65 will need approximately $280,000 to cover health care and medical costs in retirement, according to the annual estimate by Fidelity. While this estimate only increased by 2% from last year, the majority of us are nowhere near retirement and I can only imagine what that need will increase to years down the road.
The good news is that there is another opportunity to sock money away for these specific needs. It would be great to be able to predict, at best, sublime health and longevity without the need to tap into this expense factor, but the reality of health in the U.S. tells us that if all else fails, we must prepare to mitigate the burden of health care costs at most. And it’s not going to happen by stuffing cash under our mattresses.
Things to know:
HSAs offer a triple tax benefit: Assets grow tax-free. Savers can contribute to them on a pre-tax or tax-deductible basis. Assets can be tapped into tax-free if used for a qualified medical expense.
Contribution limits: Individuals can contribute up to $3450 if you have single coverage. Family coverage increases your contribution limit to $6900. And if over the age of 55 you are allowed an additional catch up contribution amount of $1000 per year.
What if I want to contribute today for costs later on down the road? HSA investors can withdraw money to cover current ongoing expenses or allow your health savings account to accumulate in value over time. Naturally, accumulation over time will yield a greater potential return (side note: I appreciate the reference to “investors” – simply because this is an investment in quality personal healthcare down the road. From that vantage put a lot more care, and attentiveness is placed on the intentionality of saving).
On top of all of that… (Yes, there’s more!)
Unlike contributions to health flexible spending accounts (FSAs), of which at most $500 can be carried over year to year depending on the plan design, all unspent contributions to HSAs roll over from year to year. So really in terms of your health plan, you can get you one that can do both – subsidize a little now and later.
Lastly, HSAs are portable – which means that as investors you can take your savings with you when you change employers or have the desire to have your personal financial advisor manage the account. And if you wanted to get a jump start on this opportunity this year, you also have a once in a lifetime opportunity to transfer savings from your IRA (individual retirement account) into an HSA; within that particular year’s contribution limits of course.
So Keepers, as the old saying goes… there’s more than one way to skin a cat; and in the financial world… diversity in investments is king.
Take advantage of the opportunities out there – you will thank you later; in the meantime continue to share with us some other ways you are choosing to diversify.
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