Plan Now for a Healthy Retirement with a Self-Directed Health Savings Account (HSA)
Published on April 15, 2014
“In sickness and in health till death do us part.” You’ve heard the vow and may have even said it. But you probably didn’t count on worrying about whether you’d have enough money for out-of-pocket health care costs in your retirement years. Unfortunately, rising health care costs and retirement go together like a horse and carriage.
Most people tend to underestimate the real cost of what they’ll spend on health care in later years. According to Fidelity Investments’ recent Retirement Savings Assessment, more than eight out of every 10 people wonder whether they can cover out-of-pocket health care costs. Almost half of the respondents, who were pre-retirees, thought they would spend $50,000 per person but the average cost that couples today really spend is more like $220,000 and that’s not including long-term care or dental.
What steps can you take today to ensure that you are retirement ready?
Aside from exercising and eating right now so you will be healthier when you retire, you can start a self-directed health savings account (HSA). An HSA is a great way to put away pretax dollars ($3,300 per individual and $6,550 for a family in 2014; those 55 years of age and over can sock away an additional $1,000). The money and earnings on it can be withdrawn tax-free when you retire and you must spend it on medical expenses to enjoy that tax advantage. HSAs are a trifecta of savings:
- Account contributions are pre-tax or tax-deductible
- Earnings, interest, and, yes, investment returns are tax-free
- Withdrawals for qualified medical expenses are tax-free. Once you reach age 65, all nonmedical withdrawals are taxed at your current tax rate, just like a Traditional IRA. (If you withdraw money for nonmedical expenses before you’re 65, there’s a 20% penalty.)
What’s more, the balance of your HSA accrues each year until you need it. However, not everyone may open an HSA since you have to be part of a high-deductible medical plan at work. If you don’t have this type of health plan, consider earmarking a specific account, such as a Roth IRA or other investment account, to pay for out-of-pocket medical expenses in retirement.
Is there a way to further maximize your health savings?
Yes, like a self-directed IRA, you can also self-direct an HSA and build up retirement savings more aggressively. Alternative investment options can be a great way for financially savvy investors to build retirement wealth through alternative asset types they already know and understand. Self-directed plans can provide informed investors the ability to develop a more diversified portfolio—investing in real estate, mortgages and other loans, private hedge funds, precious metals, limited partnerships, commercial paper and notes and more—that they control. A self-directed retirement plan or health savings account provides investors with greater investment flexibility. A third-party administrator such as Next Generation Trust Services handles all the details of the transactions, holds the assets and ensures you are investing within IRS guidelines..
At Next Generation, our professionals are available to answer questions about self-directed retirement plans, contribution limits, and the general tax benefits related to each type of retirement account. However, since we do not give investment advice, we strongly recommend you consult your trusted financial advisors about your investments and your unique situation.