By Alessandra Malito, MarketWatch Aug. 10, 2019 8:30 am ET
A new legislative proposal would allow
Americans to save for health care in a tax-efficient manner well into their
60s—but it might do more harm than good.
Health savings accounts are a helpful tool in
saving enough money for medical bills in retirement, but only until a person’s
65th birthday. Once Americans become eligible for and enroll in Medicare, which
happens at 65, they’re no longer allowed to contribute to an HSA. There are
certain cases where an individual can delay Medicare
enrollment and therefore continue saving in an HSA, but improperly deferring
enrollment risks accruing penalty fees and is an expensive mistake that lasts a
lifetime (not just for the year in which someone made the mistake).
Under the current plan, once a person enrolls
in Medicare, she is no longer allowed to contribute those pretax dollars, but
she can withdraw what she’s saved and earned in that account to pay for
health-care expenses, including Part B premiums and co-payments.
The Health Savings
for Seniors Act, sponsored by Rep. Ami Bera, a Democrat from
California, would allow Medicare beneficiaries to continue participating in an
HSA. But it would also strip beneficiaries the ability to use money in their
HSAs toward their Medicare Part B premiums, which are at least $135.50 a month.
“One of the best things about HSAs is that
someone can diligently save in it for 10 to 15 years before retirement, and
bank a lot of that money to pay for Part B,” said Danielle Roberts, co-owner of
Boomer Benefits, a company that helps older Americans with Medicare insurance.
Eliminating this provision would be a disservice to older Americans, she said.
The bill would also charge a penalty for any
withdrawals used to pay for nonqualified health expenses. In its current form,
account holders can use their savings for any purchases after 65, whether
they’re for medical purposes or not, and simply pay an income tax on the
withdrawal as they would with most other investment accounts. The bill was
introduced in July, and would have to pass through the House, the Senate and the
president’s desk before it becomes law.
The opportunity to save in an HSA past 65, and
even while enrolled in Medicare, is huge for older Americans, Roberts
said—especially considering the fact that many people are living longer and
working longer.
“If you were able to continue maxing out and
retired at 75, you’d have a significant amount more money to spend on health
care,” she said. But these additional provisions to disallow HSA funds to pay
for Medicare Part B premiums and thwart individuals from paying for non-health
expenses after 65 could place older Americans at a disadvantage, she added.
Financial advisers tout HSAs as one of the
most beneficial ways to save for retirement. Medical expenses are staggering
during this phase of life — the average couple retiring this year at 65 can
expect to spend $280,000 on health care,
not including long-term care — and HSAs offer a triple-tax benefit, where
contributions, investment earnings and withdrawals are all tax-free if used for
eligible expenses. Advisers caution investors to contribute as much as they can
up to the maximum, if possible, and avoid touching those assets until retirement.
HSAs aren’t feasible for everyone. The maximum
contribution to an HSA is $3,500 for single individuals and $7,000 for a
family, and accounts are only available to people with high deductible health
plans, which aren’t a good option for some families.
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