How HSAs Could Help Your Retirement Savings

Updated : Nov 09, 2019 in Articles

How HSAs Could Help Your Retirement Savings


The words health savings account may
not conjure up thoughts of relaxing on the beach, traveling the world, or gardening in
your backyard full time. But maybe they should. Because of its potential tax benefits, a health
savings account, or HSA, can actually be a powerful retirement savings vehicle if you
plan ahead. Let’s talk about how HSAs typically work,
and then discuss how to use one to potentially boost your retirement savings. HSAs allow you to set aside untaxed money
each year to pay for medical costs now and in the future. Many employers offer access to HSA-enabled
health plans. However, you can also set up an HSA on your
own. Either way, to be eligible to make an HSA
contribution, you need to be enrolled in a High-Deductible Health Plan one with low
monthly premiums but high, out-of-pocket deductibles. The main benefit of HSAs is that they allow
you to take advantage of tax savings in three ways. First, contributions are essentially untaxed. For an HSA provided through your employer,
contributions are typically deducted pretax from your paycheck. Or, if you’re on your own, they’re tax-deductible. However, the IRS does set an annual limit
on contributions. So keep that in mind, especially if you have
more than one HSA. Second, some HSA account providers allow you
to invest your contributions once you reach a certain balance. The investment choices in an HSA are often
similar and as flexible to those available in other retirement accounts. Earnings in an HSA account aren’t taxed,
so your investments can compound more quickly. Lastly, you may make tax-free withdrawals
to pay for qualified medical expenses. So, basically, if you use your HSA only for
medical expenses, you can contribute, grow, and spend this money without ever paying taxes
on it. This is what makes HSAs one of the most tax-efficient
investing accounts around. But keep in mind, any money withdrawn for
nonmedical expenses will be subject to regular income taxes, and if you’re younger than
65, you’ll also pay a 10% penalty. Another benefit of HSAs is they’re portable,
like an IRA. This means whether you leave your job, change
health insurance providers, or retire, your money can go with you. You can even pick a different HSA provider
to transfer your HSA funds to, if you don’t like the one provided by your employer. Now that you understand how an HSA works and
its benefits, let’s discuss how it can actually help with retirement planning. Because you’re not obligated to spend the
assets you’ve placed in your HSA, you could use them later in retirement to cover medical
costs. According to the U.S. Bureau of Labor Statistics,
households run by individuals 65 and older spend an average of $500 a month on medical
expenditures alone, so having a source of tax-free funds can be a lifesaver. Even if you’re lucky enough to have low
medical expenses during retirement, you can use an HSA like a traditional retirement account
after you turn 65. This means you can make withdrawals for nonmedical
expenses without a penalty, but you’ll be required to pay income tax on those funds. Now let’s look at a few things you should
be aware of while considering if a health savings account is right for you. First off, an HSA for retirement only works
if your medical expenses are low. The High-Deductible Health Plans that make
you eligible for an HSA may require greater out-of-pocket costs, especially if you visit
the doctor often. HSAs are designed for you to set aside money
to pay for those higher out-of-pocket expenses. If you have high medical expenses over the
years, you may not accumulate enough to invest for retirement. Another factor to consider is although HSAs
can help you grow your money by avoiding taxes, HSAs are subject to fees for account maintenance
and the investments themselves, which can eat into earnings. And, of course, the underlying investments
themselves are subject to risks, including loss of principal. So if your circumstances allow, setting up
an HSA, making the maximum contribution permitted each year, and allowing the funds to grow
while not touching them for short-term medical expenses could make it easier to pay for medical
expenses during retirement. And once you’re 65 or older, you may use
those funds for nonmedical expenses without a penalty. However, that money would then be subject
to income tax. Retirement is your time to sit back and enjoy
yourself. And an HSA may help you get your finances
in order so you can relax during your golden years.

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