Health Savings Accounts for Medical and Retirement Costs

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Experiencing a cancer diagnosis – or that of a loved one – may well be the worst moment in anyone’s life. However, learning about the cost of treatment may come in a close second.

The latest and most effective cancer drugs today cost an average of $10,000 per month but can range higher than $30,000 a month. Even patients with insurance and discounts often pay about a third of that cost each year, and cancer patients are three times more likely to file for bankruptcy.1

As a result, one in eight cancer patients in the United States rejects treatment because of the high cost.2Older patients may reject it so that they don’t leave their spouse financially strapped after they pass away. Younger families may liquidate savings and every financial asset they own to secure treatment for a child. Regardless of the circumstance, cancer or other major diagnoses can pose a serious risk to a household’s financial security.

One way to help pay for health care expenses is through a health savings account (HSA). An HSA can be opened in conjunction with enrollment in a high-deductible health plan. It is designed to use pre-tax money to pay for medical expenses not covered by the plan.

While most people use their HSA as a tax-free way to pay for out-of-pocket medical costs, it may also be useful as a tool for retirement savings growth for some.3 One way to increase HSA assets is to use current income to pay for health care expenses so that the account balance can grow untouched. Another way is to invest those HSA funds for a potential growth opportunity. Money in a health savings account enjoys a unique triple tax benefit:4

  • Funds are contributed on a pre-tax basis
  • Contributions grow tax-free
  • Funds may be withdrawn tax-free when used for qualified medical expenses

Before or during retirement, HSA assets can be used for nonqualified expenses, although they will be subject to ordinary income taxes and a 20 percent penalty. After age 65, funds used for nonqualified expenses avoid the 20 percent penalty and only face ordinary income tax.5 Funds used for qualified medical expenses remain tax-free at age 65 and beyond. However, those enrolled in Medicare can no longer contribute funds to an HSA. Similarly, if you are claiming Social Security benefits at the time you become eligible for Medicare, at age 65, you will be automatically enrolled in Medicare Part A, which also disqualifies HSA contributions.

Also, be aware that the return and principal value of invested HSA assets will fluctuate and, when accessed, may be worth more or less than their original value. Assets placed in investment options are not FDIC-insured, nor are they guaranteed by the bank that administers the health savings account.

1 Tristan Fitzpatrick. Cancer Support Community. Feb. 7, 2018. “The Financial Impact of a Cancer Diagnosis.” Accessed Nov. 9, 2018.

2 Ibid.

3 Ray Martin. CBS News. Sept. 17, 2018. “Many savers missing out on the HSA’s benefits for retirement.” Accessed Nov. 9, 2018.

4 Ibid.

5 Kathleen Elkins. CNBC. Aug. 10, 2017. “Americans are using this ‘loophole’ to save more for retirement. Accessed Nov. 16, 2018.