Healthcare costs are undoubtedly one of the top challenges that retirees face—especially when overall inflation is running hotter than at any time in the past few decades.
Enter the health savings account, which offers an unmatched tax shelter for dollars that can be used to pay healthcare expenses. HSA adoption has increased rapidly in recent years, fueled by the rise of high-deductible health insurance plans.
Industry advocates often position HSAs as a way to build savings that can be used to meet health costs in retirement. And the tax advantages are compelling: HSA contributions are tax-deductible, investment growth and interest are tax-deferred, and withdrawals spent on qualified medical expenses also are tax-free. The triple tax benefit increases buying power, especially compared with drawing down from a 401(k), which is subject to ordinary income tax on contributions and investment gains.
Some lawmakers would like to loosen restrictions on HSA eligibility, contributions, and withdrawals.
The track record of these accounts suggests that they help people with high incomes accumulate tax-sheltered assets that can be used for healthcare and other needs in retirement. But they do little to expand affordability—or coverage—for the broader population. Meanwhile, HSA tax breaks are projected to cost the federal government more than $180 billion in foregone revenue over the next decade, according to the Center on Budget and Policy Priorities
Learn more in my column for Morningstar.