The major unknown for most retirees is the amount of money they need to set aside for their health care needs after they leave the workforce. As the baby boom generation continues to retire, you can expect more and more innovative solutions to address the problem.

Innovation usually occurs around the greatest need in the market place. As stated in the wonderful movie “Jerry McGuire,” it’s “Show me the money!”

Health Savings Accounts (HSAs) were introduced in 2003. They require that you have a high-deductible insurance plan but allow you to put money into an account for current or future medical expenses. Not only is the contribution tax deductible, but the growth, when used appropriately, is also tax-free. The problem is, the rules seem to be confusing for some.

One of the big surprises for individuals is that you must incur the expense before taking the distribution from your account. The penalty for failure to comply is a harsh 20%, so knowing the rules are critical.

You can add money to your HSA (contributions up to $7,000 for a family with an additional $1,000 per year for people over 55) every year, but you don’t have to take a distribution every year. Many families allow the accounts to accumulate over time even when they have medical expenses so that they have a war chest for future retirement expenditures.

The HSA can be used to pay for Medicare premiums, and it can be used for you, your spouse, or your dependents. You own the plan, so your unused balance rolls over every year and you can take it with you if you change jobs or retire. The portability and flexibility make this an ideal health care strategy for retirement if you can use it.

Assuming you get to 65 with money in the account and are fortunate enough to not need the money for health care expenses, you can access the account with no tax penalty but full taxation. If you take the money out before age 65 (unless you are deemed disabled) and use it for non-medical expenses, the 20% tax penalty does apply.

Qualified medical expenses are the key, but the rules are liberal and vast. Long-term care insurance premiums, hearing aids, and even prescribed vitamins are acceptable expenses, according to

If you die with money in your account, it can pass to your spouse but not dependents. When you are both deceased, the HSA dissolves. These rules, like everything else in the tax code, can change, but this is a very viable tool.

Preparing for retirement is a process. There are many unknowns. Health care expenses and tax rates on withdraws are at the top of my concerns for most families that hire us. Accumulating assets inside of tax-deferred plans like 401k’s, 403b’s and IRAs is much easier than actually using those dollars during distribution. Your life span may very well be longer than you expect!

Joseph “Big Joe” Clark, whose column is published Sundays, is a certified financial planner. He can be reached at or 765-640-1524.