Too many workers fail to take advantage of this key retirement savings tool

Many people assume that their cost of living will go down in retirement. But if there’s one expense that’s more likely than not to climb, it’s health care.

Fidelity estimates that an average 65-year-old male-female couple leaving the workforce this year can expect to spend $ 300,000 on health care throughout retirement. And while you can step into your retirement years with a nice amount of money in your IRA or 401 (k) plan, you may also find that medical bills consume an uncomfortable part of it.

Fortunately, there is another cost effective way to save for your future health care expenses: a Health Savings Account, or HSA. While not everyone is qualified to participate in an HSA, since eligibility depends on enrollment in a high deductible insurance plan, many people can exercise this savings option.

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But in a recent Charles Schwab survey, 79% of employees are offered an HSA by their employer, but only 49% use this account. And that’s a big mistake.

The advantage of HSAs

Many people like to save in IRAs and 401 (k) for the tax benefits involved. But HSA offers even more tax savings.

HSA contributions are made in pre-tax dollars, and any funds that are not needed immediately can be invested for further growth. HSA earnings can be enjoyed tax-free, as can withdrawals, provided they are mistaken for qualifying medical expenses.

Also, to be clear, HSA funds never expire. Some workers confuse them with flexible spending accounts, or FSAs, which must be used year after year to avoid losing money. But HSAs have completely different rules.

HSA annual contribution limits

Like IRAs and 401 (k), HSAs have their own annual contribution limits. For the current year, these limits are:

  • $ 3,600 for workers under 55 saving for their own account
  • $ 4,600 for workers aged 55 and over saving for their own account
  • $ 7,200 for workers under 55 saving in the name of a family
  • $ 8,200 for workers aged 55 and over saving in the name of a family

In 2022, these limits will increase by $ 50 for individual coverage and $ 100 for family coverage. As such, here’s what next year’s limits will look like:

  • $ 3,650 for workers under 55 saving for their own account
  • $ 4,650 for workers aged 55 and over saving for their own account
  • $ 7,300 for workers under 55 saving in the name of a family
  • $ 8,300 for workers aged 55 and over saving in the name of a family

It pays to save in an HSA

Many people assume that once they enroll in Medicare their health-related expenses will go down. In fact, many people end up spending more money as Medicare registrants between the costs of premiums, deductibles, co-payments, and the fact that more health issues tend to arise as part of the program. aging process.

If you want to avoid a financial crisis later in life then you better see if you qualify to contribute money to an HSA and do your best to maximize it year after year. This way, you’ll have peace of mind knowing that a major retirement expense is covered.

About John Tuttle

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