When clients ask advisor Phillip Christenson about health-care planning, he admits he has no idea how health care will look when they’re ready to tap funds. Therefore, he runs a few different scenarios, analyzing how much they will need if health-care costs inflate by 10 percent or 15 percent or more. “There’s no real answer, since we don’t know what’s going to happen in the future,” said Christenson, who co-founded Phillip James Financial.
If the clients need more savings, he will see if they qualify for a health savings account.
“The HSA is not only a huge benefit for medical costs, but it’s also like a secret IRA,” Christenson added.
According to the American Health Insurance Plans, the rate of HSA use has risen to 20.2 million last year, up from 3.2 million in 2006. It has become a popular tactic to earmark some retirement savings specifically for health care, since you can carry over the balance if you don’t use the funds for health-related costs.
Contributions to the HSA are tax-free, and there’s a $6,750 limit for families. The earnings also grow tax-free and, if you use the funds for qualifying medical expenses, then the entire distribution circumvents the IRS.
“If it’s available to you, take advantage as much as possible, and try not to use it for health-care costs while working,” said Dostal at Sontag Advisory.
But not everyone qualifies. You have to enroll in a high-deductible — $2,600 for a family — health-care plan. Dostal is such a big supporter of the tool that, while his wife and kids are insured through her employer-provided health plan, he himself is enrolled in a separate, high-deductible plan so he can save through an HSA.