Paying for Long-term Care with Health Savings Accounts

A health savings account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan (HDHP).  There are no taxes on the contributions and no taxes on qualified withdrawals.

As the cost of long-term care (LTC) insurance rises and the benefits decline, alternatives are appearing on the market. An HSA is one such alternative. Here’s how it would work. You (and many times your employer) contribute the maximum permissible amount each year. For 2015, if you have self-only HDHP coverage, you can contribute up to $3,350; if you have family HDHP coverage you can contribute up to $6,650. Now here’s the trick, don’t withdraw funds to meet your current medical costs. Instead, pay those costs out of pocket. This allows your annual HSA contributions to grow tax free!

As an example, suppose you are currently 45 years old and are eligible for an HSA at work. Also, assume that you and your employer’s combined contributions hit the maximum allowed contribution of $6,650 (for you and your spouse) and that 1/12 of this amount is contributed at the beginning of each month. Assume that you make these contributions every year until you reach age 65 when Medicare makes you ineligible for HDHP insurance which makes you ineligible for an HSA. Finally, assume that your HSA funds grow at 3.5% per year. This will produce approximately $190,000 when you reach age 65.

A couple of key points about this:

  • It’s important to hold your HSA account in a place that gives you access to mutual funds. (Many HSAs default to a very low-rate bank account. Banks, credit unions, insurance companies and IRS-approved entities are generally the best places to look for an HSA custodian. Vanguard or another brokerage firm with low-cost funds is a good place to start. While companies like Vanguard can’t act as your HSA custodian, many of their funds are accessible through other companies. For example, HealthSavings Administrators specializes in HSA accounts and is the sole provider to offer only Vanguard investment options.
  • Many people feel the best age to purchase LTC insurance is in your mid-50s. With this HSA strategy, it’s best to start as young as possible. Often this is when you get your first job.
  • If $190,000 (or whatever your situation produces) doesn’t seem like enough protection, consider a hybrid approach. Build your HSA account and purchase a LTC policy to increase your coverage.
  • Note that your spouse can be your HSA beneficiary. Then, upon your death, your HSA will become your spouse’s HSA.

As usual, there are a number of important details that need to be considered here. Fortunately you don’t have to figure this out on your own. Guidepost Financial Planning is able to help you with this and all other aspects of your financial planning. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.