HSAs: The antidote to rising health costs

Be better prepared to battle increasing health insurance costs.

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As health insurance costs continue to rise, the benefits of a health savings account (HSA) are becoming more apparent. Health care consumers increasingly find themselves on the hook for thousands of dollars in costs annually, including deductibles, copayments, coinsurance, and premiums.

If you're among those who could use some help covering these costs now and in retirement, an HSA could be attractive. Here's what you should know:

  • Remind me: What exactly is an HSA?
    HSAs are individual accounts offered by employers in conjunction with an HSA-eligible health plan to cover qualified medical expenses. If you put money in an HSA and use that money to pay for a doctor's visit or another qualified medical expense anytime now or in the future, you never pay federal taxes on the money. And although state taxation may vary, most states follow the federal tax law.

    In 2018, you can contribute up to $3,450 annually to an HSA if you have self-only coverage and double that amount—up to $6,900—if you have family coverage. (Employees over age 55 at the end of the tax year can contribute an additional $1,000.)
  • Triple tax advantages
    You can automatically deduct the amount you choose to save from your paycheck on a pre-tax basis, reducing the amount of earnings on which you pay income tax. Earnings on your contributions to HSA accounts also grow tax-free, a feature you wouldn't enjoy if you invested for health care expenses outside an HSA.

    Withdrawals you take to pay any qualified medical expense—whether for a prescription drug or blood test to measure cholesterol levels, for example—are also tax-free.1
  • Other perks
    If you're the type of person who is relatively healthy and requires little more than annual checkups, there are other good reasons to contribute to an HSA. First, you get to roll over your balance from year to year with an HSA, unlike a flexible spending account where you have to generally use or lose the money you've contributed within a limited timeframe. Second, you get to invest your HSA contributions as you do with 401(k) or 403(b) account money. If you are near retirement or are a very conservative investor, you can put contributions into an interest-based account or balanced fund. More aggressive investors who are generally healthy might consider investing in equity funds.
  • Withdrawals
    What you can't do, though, is take withdrawals from an HSA before age 65 for non-health care expenses without triggering federal income tax and a 20% tax penalty on the amount taken. So it's a good idea to not contribute money to an HSA that you might need for other expenses before you reach that age.

    At age 65 and beyond, you can take penalty-free withdrawals from an HSA and pay only income tax on the amount. And, of course, distributions taken for health care-related expenses are always tax-free, whether you're 35 or 85.
  • Be realistic about what you may need in retirement
    People continue to underestimate the out-of-pocket cost of health care during their retirement. In a 2016 survey, 44% of people said they think will need less than $50,000 for health care in retirement.2 But Fidelity estimates a couple retiring today at age 65 will spend $275,000 to cover health care and medical expenses (up 6% since 2016).3 That's a significant gap in perception.
  • Help with more than just health care costs
    A well-funded HSA can help take a bite out of health care costs in retirement, not just during your working years. Should you not need the money for health care, an HSA can provide an added financial cushion in retirement.

One thing is certain: Health care costs don't get less expensive with time—in fact, the opposite is true. If you have to pay for health care one way or another, why not consider the tax-advantaged benefits of an HSA?

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Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.
1. With respect to federal taxation only. Contributions, investment earnings, and distributions may or may not be subject to state taxation. The triple tax advantages are only applicable if the money is used to pay for qualified medical expenses.
2. Represents the findings of an online survey conducted among a demographically representative U.S. sample consisting of 5,133 adults, 18 years of age and older. Interviewing for this CARAVAN® Survey was completed Dec. 9-21, 2016, by ORC International, which is not affiliated with Fidelity Investments. 1,309 respondents enrolled in an HSA-eligible health care plan were included in the analysis. The results of this survey may not be representative of all adults meeting the same criteria as those surveyed for this study.
3. Estimate based on a hypothetical couple retiring in 2017, 65 years old, with life expectancies that align with Society of Actuaries' RP-2014 Healthy Annuitant rates with Mortality Improvements Scale MP-2016. Estimates are calculated for "average" retirees, but may be more or less depending on actual health status, area of residence, and longevity. Estimate is net of taxes. The Fidelity Retiree Health Care Costs Estimate assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government's insurance program, Original Medicare. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services, and long-term care. Life expectancies based on research and analysis by Fidelity Investments Benefits Consulting group and data from the Society of Actuaries, 2014.
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
The statements and opinions expressed in this article are those of the author. Neither Fidelity Investments nor your employer can guarantee the accuracy or completeness of any statements or data.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

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