Make a Health Savings Account Part of Your Retirement Plan
You’ve heard of 401(k)s and IRAs as retirement savings vehicles—and you may already have a solid investment strategy using one or both of these account types in your retirement plan. But have you considered including a health savings account (HSA) in your retirement strategy?
Let’s take a look at the advantages of an HSA and how to maximize its benefits for your retirement.
What Is an HSA?
Health savings accounts were designed to help people who have high-deductible health plans (HDHPs) pay for their out-of-pocket medical expenses. In 2020, an HDHP is a plan with a deductible of at least $1,400 for individuals and $2,800 for family coverage.
Unlike a flexible spending account (FSA), you aren’t required to use all the money in your HSA before the end of the year. Your account balance rolls over from year to year—and from job to job. The account is yours, and even if you change insurance plans to one that isn’t a high-deductible health plan, you don’t lose your HSA. You simply can’t make more contributions until you have an HDHP again.
Benefits of a Health Savings Account
While HSAs were designed for supplementing medical expenses, they’re so much more than that. They give you a triple-tax advantage:
- You may make post-tax contributions, which you can deduct on your tax return, or pre-tax contributions through payroll deductions.
- Once you invest in an HSA, the money grows tax-free.
- Unlike an IRA or 401(k), you aren’t taxed when you take withdrawals from an HSA as long as you use the money for qualified medical expenses.
The money in your HSA can be invested like you would your IRA. Once you reach age 65, you’re no longer limited to using it for medical expenses. You’ll pay income taxes on distributions that aren’t related to health care, but you won’t pay the 20% penalty that is applied for early non-medical withdrawals. And unlike an IRA, there are no required minimum distributions (RMDs) once you reach age 70½.
How to Use an HSA for Retirement Savings
An HSA is a strong asset going into retirement, thanks to its versatility and tax-free earnings potential. Here are a few tips for using your HSA wisely as part of your retirement strategy:
- Contribute the maximum amount you can. You can contribute to an HSA only until you sign up for Medicare (most qualify at age 65), so you should make the most of it while you’re eligible. The maximum HSA contribution in 2020 for individuals is $3,550 and $7,100 for families. Investors age 55 or older can make catch-up contributions of an additional $1,000.
- Pay out-of-pocket now and reimburse yourself later. While you have the option to use your HSA funds for medical expenses now, many choose to treat their HSA like a traditional retirement account, meaning they don’t touch the money until after they retire. If you can afford to, pay out of pocket for health care costs now—and save all your receipts. Let your HSA grow untouched, and then reimburse yourself for those medical expenses once you’re ready to start withdrawing.
- Invest your contributions. A good strategy is to treat your HSA like your other retirement assets such as an IRA or a 401(k). Select a diversified portfolio that takes your personal risk tolerance and long-term investment strategy into account.
- Use your HSA to fund retirement medical expenses to maximize your tax benefits. With retiree health care costs rising, the best way to plan to use your HSA funds in retirement is for various medical expenses. HSA disbursements used on qualifying medical expenses (such as doctor’s visits, insurance deductibles, prescriptions, hearing aids, and wheelchairs) remain tax-free.
- But you’re not limited to using HSA funds for medical costs. The beautiful thing about HSAs is that they begin acting like a traditional IRA once you hit retirement age. At that point, you can take disbursements from your HSA for any purpose—with only income tax due. In other words, an HSA can act like a second IRA, which effectively doubles your maximum contribution limit now and doubles your retirement savings potential for the future.
A health savings account is one of the best investment options you can choose for your retirement plan. Our Richmond, Va. financial planning firm generally recommends our clients take advantage of an HSA if they have access to one. Consider working with a financial advisor to determine how to incorporate an HSA into your retirement plan.
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