Health savings accounts: Good retirement medicine

A common error in retirement planning is underestimating the often considerable costs of health care that older people require. Fidelity estimated that a couple retiring in 2017 will need at least $275,000 to cover their medical needs -- and that doesn't include long term care.

What's an HSA?

One vehicle that can help meet those financial needs are health savings accounts, or HSAs. To qualify to open an HSA, you first need to have a high-deductible insurance plan. In this case, that's a health plan with a minimum deductible of $1,300 for individuals or $2,600 for families. Those plans tend to have lower upfront premiums, but you will likely pay more out-of-pocket for care than you would with other insurance plans.

"It's also important that anyone considering starting an HSA understand the consequences of choosing a high-deductible plan and have a clear plan for covering their deductible as they build up the value in their HSA," financial adviser Lori DeFoor told CBS MoneyWatch. "Typically, this is a robust emergency fund, or a plan to purchase some type of supplemental insurance for a few years while they build up the value in their HSA."

HSA contributions and qualified withdrawals are tax-free, as is earned interest. And, unlike flexible spending arrangements, HSA funds don't expire and stay with you from job to job.

Using the money wisely

The money can be used at any time for qualified medical expenses, such as the birth of a child or to pay certain out-of-pocket costs. HSA contributions aren't allowed after age 65, or when you qualify for Medicare. But you can take money out penalty-free after that age, though such withdrawals are taxable if they're not for a qualifying medical expense.

Yearly contributions are capped at $3,400 for qualified individuals and $6,750 for families. There's no income limit, unlike for other types of retirement plans, which means high income earners can still use HSAs. Once you have $1,000 in the account, most HSAs let you invest the remaining balance.  

To maximize the benefits of having an HSA during your retirement years, most experts advise that you start saving early, and invest to grow your money.  

"If a family contributes approximately $6,000 per year to an HSA, compounded at 6 percent growth for 20 years, that's $234,000 at retirement -- a healthy account balance that can be used tax-free for any long-term care or other medical expenses," financial adviser Preet Shah said.

Choosing the right plan

One thing to keep in mind: HSAs can have fewer investment options than plans like a Roth IRA or 401(k) and may be subject to additional fees. So while HSAs can help with health care expenses, financial experts recommend using a variety of saving and investing vehicles to prepare for retirement.

Financial adviser Eric Roberge said it's wise to take all of your retirement needs into account before putting money into an HSA.  

"People should consider funding an HSA after getting the full matching contribution on their employer 401(k) plan. It's the only type of account that is tax-free in and tax- free out...You should do careful analysis on the risks of using an HSA before taking that route."