Worried About Healthcare Costs in Retirement? Don't Just Pad Your IRA or 401(k).

Some of the expenses you face during your working years might shrink once you retire. Take transportation. If you're not commuting to a job, you may not spend as much money on gas and parking. You may not even need a car at all, depending on where you live.

However, there's one expense that typically increases during retirement -- healthcare. And there are a few reasons for this.

Image source: Getty Images.

First, as people age, they tend to experience more health issues and require more care. Second, some people may have lower out-of-pocket costs on an employer-sponsored health insurance plan than with Medicare. In addition, within the context of Medicare, there can be a number of coverage gaps.

Medicare doesn't pay for certain services, like dental and eye exams or hearing aids. While Medicare Advantage plans generally do cover these services, there can be other costs associated with them.

If you're worried about covering the cost of healthcare in retirement, you may be inclined to boost your IRA or 401(k) contribution rate. While increasing contributions to a general retirement plan is a smart idea, you may want to focus on one specific account, as well.

Are you taking advantage of an HSA?

It's not a given that you'll be able to contribute to a health savings account, or HSA, as that requires you to be enrolled in a high-deductible health insurance plan that meets certain criteria. However, if you are able to participate in an HSA, it pays to do so.

An HSA is a combination savings and investment account you can use to pay for healthcare expenses. The nice thing about this type of account is that it combines the best perks of traditional and Roth IRAs and 401(k)s into one account.

With an HSA:

• Your money goes in tax-free.
• Funds you invest get to grow tax-free.
• Withdrawals used for qualifying healthcare expenses are tax-free.

All of these tax breaks combined make it worthwhile to fund an HSA, even if you haven't yet maxed out your IRA or 401(k). Plus, it's a good thing to have an account that's dedicated to healthcare expenses that you can tap at any time.

The smartest thing to do with an HSA, however, may be to reserve the money for retirement, because you might need it the most later in life. Also, it pays to let that money grow as long as you can.

If you withdraw from your HSA every year while you're working to pay for smaller medical bills, any money you remove is money you can't invest. Over time, that can add up to a lot, which is why it pays to pretend that money isn't there and only use it during your working years if you truly have no other choice.

A world of flexibility

It's true that you'll be charged a penalty for withdrawing from your HSA for a non-medical expense. For this reason, you may be hesitant to use one.

Actually, once you turn 65, you can take an HSA withdrawal penalty-free for any purpose -- it doesn't have to relate to healthcare. In that case, your withdrawal will be taxable. But that basically puts your HSA on par with a traditional IRA or 401(k) plan. And if you use the money for senior healthcare expenses, it's yours tax-free.

Fidelity says that the average 65-year-old person retiring in 2025 might spend $172,500 on healthcare from that point onward. That's a lot of money.

Having funds in an HSA is a great way to cover your healthcare expenses in retirement and minimize your stress. If you're concerned about paying for medical care later in life, it pays to see if you qualify for an HSA and start contributing to one immediately.

The Motley Fool has a disclosure policy.