This healthcare mistake is costly for seniors /

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Older Americans have the chance to be healthier and wealthier, but the underpowered financial inclination bothers them.

A study finds that a large proportion of older Americans who save for health care are skipping tax-advantage ways to accumulate that money.

Researchers at the University of Michigan surveyed more than 2,000 people aged 50 to 80 about whether they saved for Medicare, and if so, how. The findings suggest that many older Americans do not save on health care expenses at all.

Yet it was almost alarming to find that among those who save, not many are using efficient tax methods to do so.

Choosing not to get health care

Old people upset
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In January 2021, the University of Michigan National Survey on Healthy Aging surveyed a national sample of more than 2,000 adults, ages 50 to 80, about the concerns they had during 2020 regarding the provision and provision of needed health care in the future. for health care.

The survey found 13% delayed seeking medical care because they were concerned about the cost, 12% needed medical care but did not get it because they could not afford it, and 15% had problems paying bills for medical, dental or other healthcare.

Moreover, they were pessimistic about the future: 18% were not at all confident that they would have enough money to pay health care expenses next year.

Of the 71% of adults surveyed who had not saved money to pay for healthcare in the past 12 months, 40% said they already had enough savings to pay for healthcare they might need.

More than 1 in 4 who didn’t save said it was because they couldn’t afford it. Other less common reasons were not needing any healthcare services (18%) and not thinking about it (13%).

Less than 1 in 3 adults (29%) report that in the past 12 months they have set aside money to pay for health care expenses before they need it. Savers put money aside in many ways.

Here are ways to increase your healthcare spending.

Health savings accounts

health savings account
Andrey Yalansky /

The study found that only 5% of adults put money into health savings accounts (HSAs) before they needed it. An HSA, which must be paired with a high-deductible health plan, allows you to invest for future medical expenses while enjoying special tax breaks.

Your contributions, which are pre-tax, reduce your taxable income and grow your money tax-free. Also, your withdrawals are tax deductible as long as you use the funds for eligible medical expenses.

Since the HSA is yours and not your business owner, any unused money in the account is yours to keep, and that money continues to grow due to tax-deferred.

The IRS sets HSA contribution limits each year, but they are usually high. For 2021, the maximum HSA contribution is $3,600 for a self-directed plan or $7,200 for a family plan. But if you are at least 55 years old, you can make an additional compensation contribution of $1,000 into your account.

For 2022, the maximum HSA contribution is higher: $3,650 for a self-directed plan or $7,300 for a family plan. The compensatory contribution limit for those 55 or older remains at $1,000 in 2022.

Flexible spending accounts

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The study also found that only 9% of survey respondents said they put money into flexible spending accounts (FSAs) before they needed medical care. FSA accounts are employer-provided accounts that don’t require a high-deductible health plan, so you can pair them with a low-deductible health plan.

Employers can contribute to these accounts but are not required to do so. These plans can be used to cover co-pays, deductibles, certain medications, and various other medical and dental costs.

You don’t pay taxes on contributions, which means you’ll save an amount equal to the taxes you would have paid on the money you set aside.

Although FSAs are by your employer provided you can carry forward up to $550 of unused funds the following year or give you a 2.5-month grace period to use the funds the following year.

In order to obtain an FSA, you must register during the employer’s annual open enrollment period, usually in the fall. Unlike HSAs, your FSA contributions do not earn interest, and because these plans are provided by your employer, you lose these accounts if you leave your job.

The maximum contribution for medical FSAs (which differs from dependent care FSAs) for 2021 and 2022 is $2,750 per person, as it was in 2020. For spouses, each spouse can put up to $2,750 into their FSAs.

Health Payment Accounts

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Only 5% of adults aged 50 to 80 reported having a Health Repayment Account (HRA). These are employer-funded group health plans in which employees are reimbursed—tax-free—for qualified medical expenses up to a fixed dollar amount per year.

Employers claim a tax deduction for compensation they make through HRAs. Although you do not need to associate an HRA with a high-deductible health insurance plan, you should still associate it with a group health plan as determined by your employer.

Unused amounts may be carried forward for use in subsequent years.

Unlike HSAs, the money in HRAs is owned by the employer, who decides how much to fund HRAs for employees. If you let an employer sponsor an HRA, the employer keeps the money in the account.

bank accounts

Elderly woman counting money in front of the piggy bank
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Bank accounts were used by 19% of adults surveyed.

Bank accounts do not offer the tax benefits of HSAs, FSAs, and HRAs, yet they are more popular among Americans who make money for health care.

Who allocates money for health care expenses?

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Savings for health care in one of these accounts above in the past 12 months was more common among individuals aged 50 to 64 years than among those aged 65 to 80 (34% vs. 22%).

More educated people also tend to save for health care at higher rates: individuals with at least a bachelor’s degree were more likely to have saved for health care in one of these accounts in the past 12 months than those with a high school education or less (38% vs 22% ).

In addition, individuals with an annual household income of at least $100,000 compared to an income of less than $30,000 (39% versus 19%) were more likely to save on health care expenses.

Among those who put money aside for health care in HSAs, FSAs, HRAs, and bank accounts in the past 12 months, 44% saved $2,000 or more, 18% saved $1,000 to $1,999 and 24% saved less than $1,000.

Those who save for health care in mere bank accounts lose out on the opportunity to take advantage of the tax benefits offered by HSAs, FSAs, and HRAs.

bottom line

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A large number of Americans between the ages of 50 and 80 have not spared their health care expenses. Not only that, but many of those who have saved do not do so in a tax-efficient manner with HSAs, FSAs, and HRAs.

Those who save in a tax-efficient manner tend to be wealthier, healthier, and better educated than those who are not.

Because health insurance plans require people to pay more of their health care costs out of their own pocket, for example through higher deductibles, these tax-advantaged accounts can help people avoid having to choose between getting and not getting health care. .

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