It’s never too early to start retirement planning, and health care is likely to be one of the biggest expenses you will face. Understanding the difference between Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA) can be a piece of your overall retirement strategy.
How Employer-Sponsored HSAs May Complement Retirement Planning
Companies across the country, including those in the Worcester area, have seen increases in the cost of providing health insurance for employees. As they look for ways to keep healthcare affordable, they have developed new benefits plans, such as high-deductible healthcare plans, which are intended to provide coverage for catastrophic medical expenses.
Smaller expenses you run into over the course of a year, such as visits to your physician for minor illnesses, may not typically covered by high-deductible plans. However, you may be protected against medical bills for serious health-related issues after you have met your deductible. For example, in 2015, high-deductible plans were defined as those with deductibles of $1,300 or more for individual coverage and $2,600 or more for family coverage.
HSA Benefits for Retirement Planning
In some cases, employers make regular contributions to employee HSA accounts, and you can add contributions of your own through payroll deductions. Contributions are not taxed at deposit or withdrawal as long as they are used for medical expenses.
The account is yours, even if you leave your employer, so steady savings over a lifetime can result in a significant account balance by retirement. As long as you don't have traditional health insurance, you can open an HSA, even if your employer does not set it up for you. Many traditional banking institutions have products for individuals, so you can most likely open a new account or roll over an existing account.
FSAs are entirely different from HSAs, and they are intended for participants with traditional health coverage. Funds contributed to FSAs can only be used for medical expenses that are not covered by insurance, such as co-payments. When it comes to FSAs, the critical point to be aware of is that funds are subject to a use-it-or-lose-it rule. Any amount remaining in the account at the end of the plan year is forfeited, so FSAs are not relevant to retirement planning.
Preparing for medical expenses is a key component of retirement planning. Health Savings Accounts offer an opportunity to set aside tax-free funds for future healthcare costs.