By one estimate, a 65-year-old couple who retire in 2019 may need about $300,000 in savings to pay their health-care expenses in retirement. This includes premiums for Medicare Parts B and D, supplemental (Medigap) insurance, and median out-of-pocket prescription drug expenses, but not other health expenses such as long-term care, dental care, and eye care.1
Health expenses are rising faster than inflation, and even insured workers are finding it harder to pay their portion from year to year (premiums, copays, coinsurance, and deductibles), much less plan for the future. The stakes are even higher for early retirees (younger than 65) and self-employed individuals who must purchase their own health insurance and bear the entire cost themselves.
A health savings account (HSA) is a tax-advantaged account linked with a high-deductible health plan (HDHP). They work together to help you cover your current health-care costs and also save for your future needs.
HSAs offer several tax benefits to help encourage diligent saving.
Depending on your state, HSA contributions and earnings may or may not be subject to state taxes.
The maximum HSA contribution limit in 2020 is $3,550 for individual coverage or $7,100 for family coverage. This annual limit applies to all contributions, including those made by you, your family members, or your employer. You can contribute an additional $1,000 starting the year you turn 55. Once you sign up for Medicare, you can no longer contribute to an HSA.
Funds roll over from year to year and are portable, which means they are yours to keep. When HSA balances reach a certain threshold, you can steer the funds into a paired account with investment options similar to those offered in a 401(k). You can make 2019 contributions up to April 15, 2020.
HDHPs are designed to help control health costs. HSA owners are forced to pay attention to prices, so they may select lower-cost providers and be more likely to avoid unnecessary spending. On the other hand, some people with HDHPs might be reluctant to seek care when they need it, because they don’t want to spend the money in their account. A high deductible can make it difficult to pay for a costly medical procedure, especially if there hasn’t been much time to build up an HSA balance.
To be eligible to establish or contribute to an HSA, you must be enrolled in a qualifying high-deductible health plan — an HDHP with a deductible of at least $1,400 for individuals, $2,800 for families in 2020. Workers who are offered HDHPs (as a choice or their only option) or purchase their own insurance often face much higher deductibles. In 2019, the average deductible for employer-provided HDHPs was $2,486 for individual coverage and $4,779 for family coverage.2
Qualifying HDHPs also have out-of-pocket maximums, above which the insurer pays all costs. In 2020, the upper limit is $6,900 for individual coverage or $13,800 for family coverage, but plans may have lower caps. This feature could help you budget accordingly for a worst-case scenario.
Premiums are typically lower for HDHPs than traditional health plans. Until the deductible is satisfied, members usually pay more up-front for services such as physician visits, surgery, and prescriptions, but typically receive the insurer’s negotiated discounts.
Some preventive care, such as routine physicals and cancer screenings, may be covered without being subject to the deductible. Under new IRS guidance issued in July 2019, the list of preventive care benefits that HDHPs may provide was expanded to include certain medications and treatments for chronic illnesses such as asthma, diabetes, depression, heart disease, and kidney disease. Providing this coverage encourages patients to seek care before problems become more serious and costly.
Another HSA benefit is that account funds not needed for health expenses are available for any other purpose after you reach age 65. Although HSA funds cannot be used to pay regular health plan premiums, they can be used for Medicare premiums and qualified long-term care insurance premiums and services that you may need later in life.
If you can afford to fund your HSA generously while working, some of those dollars could be left untouched to accumulate for many years. You could even pay current medical expenses out of pocket and preserve your HSA assets for use during retirement. But save your receipts in case you have an unexpected cash crunch. You can reimburse yourself for eligible expenses at any time.
Open enrollment is the time of year when employers typically introduce changes to their benefit offerings. If you purchase your own health insurance, you might also be presented with new options for 2020. The bottom line is that choosing and using your health plan carefully could help you save money. If you choose an HDHP, make sure to contribute the premium dollars you are saving to your HSA, and more if you can.
Before you sign up for a specific plan, read the policy information and look closely for any coverage gaps or policy exclusions, consider the extent to which your prescription drugs are covered, estimate your potential out-of-pocket costs based on last year’s usage, and check to see whether your doctors are in the insurer’s network.
October 20 to 26, 2019, is National Retirement Security Week, a nationwide effort to raise awareness about the importance of saving for retirement. Established by Congress in 2006, National Retirement Security Week is designed to elevate public knowledge about retirement savings and to encourage employees to save and participate in their employer-sponsored retirement plans. What better time to review the benefits of your retirement plan and determine if you’re making the most of them?
Whether you have a 401(k), 403(b), or governmental 457(b) plan, contributing helps benefit your tax situation. If you make traditional (i.e., non-Roth) contributions to your plan, they are deducted from your pay before federal (and most state) income taxes are calculated. This reduces the amount of income tax you pay now. Moreover, you don’t pay income taxes on those contributions — or any returns you earn on them — until you withdraw money from the plan, ideally when you are retired and possibly in a lower tax bracket.
If your plan offers a Roth account and you take advantage of this opportunity, you don’t receive an immediate tax benefit for participation, but you could receive a significant tax advantage down the road. That’s because qualified withdrawals from a Roth account are tax-free at the federal and, in many cases, state level.
A withdrawal from a Roth account is qualified if it’s made after a five-year holding period (which starts on January 1 of the year you make your first contribution) and one of the following conditions applies:
So should you contribute to a traditional account, a Roth account, or both? The answer depends on your personal situation. If you think you’ll be in a similar or higher tax bracket when you retire, you may find a Roth account appealing for its tax-free retirement income advantages. On the other hand, if you think you’ll be in a lower tax bracket in retirement, then a traditional account may be more appropriate to help reduce your tax bill now. Of course, you could also divide your contributions between the two types of accounts to strive for both benefits, provided you don’t exceed the annual maximum contribution amount allowed ($19,000 in 2019; $25,000 if you’re age 50 or older).1
Keep in mind that employer plans were created specifically to help Americans save for retirement. For that reason, rules were also established to discourage participants from taking money out early. With certain exceptions, withdrawals from traditional (non-Roth) accounts and nonqualified withdrawals from Roth accounts prior to reaching age 59½ are subject to regular income taxes and a 10% penalty tax.
Employers are not required to contribute to employee accounts, but many do through matching or discretionary contributions. With a matching contribution, your employer can match your traditional pre-tax contributions, your after-tax Roth contributions, or both (however, all matching contributions will go into your traditional, tax-deferred account). Most match programs are based on a certain formula — for example, 50% of the first 6% of your salary that you contribute.
If your plan offers a matching program, be sure to contribute enough to take maximum advantage of it. Neglecting to contribute the required amount is essentially turning down free money.
Your employer may also offer discretionary contributions, which often take the form of profit-sharing contributions. These amounts generally go into your traditional account once per year, and typically vary from year to year.
Employer contributions are often subject to a vesting schedule. That means you earn the right to those contributions (and the earnings on them) over a period of time. Keep in mind that you are always fully vested in your own contributions and the earnings on them.
While most people understand that their employer-sponsored retirement plan is a key to preparing adequately for the day when the regular paychecks stop, they may not take the time to review their plan’s benefits and ensure they’re taking maximum advantage of them. National Retirement Security Week provides a perfect opportunity to review your plan materials, understand its features, and determine if any changes may be warranted.
The Medicare Open Enrollment Period is the time during which Medicare beneficiaries can make new choices and pick plans that work best for them. Each year, Medicare plan costs and coverage typically change. In addition, your health-care needs may have changed over the past year. The open enrollment period is your opportunity to switch Medicare health and prescription drug plans to better suit your needs.
The annual Medicare Open Enrollment Period begins on October 15 and runs through December 7. Any changes made during open enrollment are effective as of January 1, 2020.
During the open enrollment period, you can:
Now is a good time to review your current Medicare plan. What worked for you last year may not work for you this year.
Have you been satisfied with the coverage and level of care you’re receiving with your current plan? Are your premium costs or out-of-pocket expenses too high? Has your health changed? Do you anticipate needing medical care or treatment, or new or pricier prescription drugs?
If your current plan doesn’t meet your health-care needs or fit within your budget, you can switch to a plan that may work better for you.
If you find that you’re still satisfied with your current Medicare plan and it’s still being offered, you don’t have to do anything. The coverage you have will continue.
The end of the Medicare Part D donut hole. The Medicare Part D coverage gap or “donut hole” will officially close in 2020. If you have a Medicare Part D prescription drug plan, you will now pay no more than 25% of the cost of both covered brand-name and generic prescription drugs after you’ve met your plan’s deductible (if any), until you reach the out-of-pocket spending limit.
New Medicare Advantage features. Beginning in 2020, Medicare Advantage (Part C) plans will have the option of offering nontraditional services such as transportation to a doctor’s office, home safety improvements, or nutritionist services. Of course, not all plans will offer these types of services.
Two Medigap plans discontinued. If you’re covered by Original Medicare (Part A and Part B), you may have purchased a private supplemental Medigap policy to cover some of the costs that Original Medicare doesn’t cover. In most states, there are 10 standard types of Medigap policies, identified by letters A through D, F, G, and K through N. Starting in 2020, people who are newly eligible for Medicare will not be able to purchase Medigap Plans C and F (these plans cover the Part B deductible which is no longer allowed), but if you already have one of those plans you can keep it.
Determining what coverage you have now and comparing it to other Medicare plans can be confusing and complicated. Pay attention to notices you receive from Medicare and from your plan, and take advantage of available help. You can call 1-800-MEDICARE or visit the Medicare website, medicare.gov to use the Plan Finder and other tools that can make comparing plans easier.
You can also call your State Health Insurance Assistance Program (SHIP) for free, personalized counseling at no cost to you. Visit shiptacenter.org or call the toll-free Medicare number to find the phone number for your state.