How to plan ahead for retirement healthcare costs

That finding is especially concerning, says Pat Jarrett, co-founder of HealthSavings Administrators, one of the plans evaluated in the report.

“You want an HSA that adjusts to changes in your situation,” he says. “There are times when people can save just a little or not much at all–and other times when they can really save and invest.”

He agrees that most HSAs are not structured to be strong as both spending and investing accounts.

“Most of them are offered by banks, and they see them mostly as checking accounts,” he says.

Aaron Benway, a certified financial planner, has created a smartphone app called HSA Coach, designed to help educate people about the accounts, manage and document healthcare receipts, and use the account as a long-term investment vehicle.

After age 65, an HSA can be used to pay a variety of qualified medical expenses, including Medicare premiums (with the exception of Medigap premiums) or long-term care premiums. (Details can be found in IRS publication 969.)

The triple tax benefit increases buying power, especially when compared with the benefit of drawing down from a 401(k), which is subject to ordinary income tax on contributions and investment gains. Benway calculates that a worker earning $60,000 would need to save 25% less to meet medical expenses by splitting annual contributions to a 401(k) and HSA.

Another tax consideration for high-income retirees: qualified HSA withdrawals are not reported as income, which means they are not counted in the formula that determines whether you must pay high-income surcharges on Medicare Part B or D premiums.

One caveat: it’s important to navigate carefully the interaction of HSAs and Medicare during the transition period away from workplace insurance. The key issue is that HSAs can only be used alongside qualified high-deductible health insurance plans, and Medicare does not qualify as a high-deductible plan. That means that if a worker or a spouse covered on the employer’s plan signs up for Medicare coverage, the worker must stop contributing to the HSA, although withdrawals can continue.

Roth IRAs

If you are not eligible for an HSA, investing in a Roth IRA–or doing a Roth conversion–can provide a second-best option.

Much will depend, of course, on the specifics of your tax situation. Roths get the income tax out of the way upfront, allowing tax-free withdrawal of contributions and investment returns down the road. Roths also are not subject to required minimum distributions (during the lifetime of the owner), which means you can preserve assets to meet healthcare expenses.

Bruno cautions that conversions can bring some undesirable “tax surprises.” She recommends considering conversions in low-marginal-income tax bracket years, especially in the years before claiming Social Security. A series of small Roth conversions that “fill up” your tax bracket can make good sense. Backdoor Roths offer another option.

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