How to Use an HSA for Retirement
If you have a high-deductible health insurance plan, you are probably familiar with your Health Savings Account (HSA). But did you know you can also use these tax-advantaged accounts to benefit your retirement?
Let’s dive in to what you need to know – and how you can maximize your benefits.
What’s an HSA?
Having an HSA account goes hand in hand with having a high-deductible health insurance plan. These policies have – you guessed it – higher deductible limits, which means you could be on the line for higher out-of-pocket expenses.
For 2019, the definition of a high-deductible plan is:
- Annual deductible not less than $1,350 for individual coverage, or $2,700 for family
- Annual out-of-pocket limit of $6,750 for individual coverage, or $13,500 for family
Your HSA is intended to help you offset those potential costs by providing tax-advantaged savings for health expenses.
How do they work?
Essentially, HSAs operate much like Traditional IRAs. You can:
- Contribute to your account on a pre-tax basis, meaning you won’t pay income taxes on those funds
- Invest your funds (though you’re not required to)
- Take tax-free distributions for qualifying medical expenses, meaning that any growth put towards medical expenses is tax-free
Also, much like an IRA, you can choose your own provider, meaning you can shop around for an HSA with the lowest fees or your preferred investment options. Your health insurance provider might suggest a specific one, but you’re not obligated to stick with it.
What are the limitations?
HSAs can be a powerful savings tool, but they do have certain limits.
First, you cannot contribute to an HSA once you’re on Medicare, and there’s a limit to how much you can put away in your HSA each year.
For 2019, HSA contribution limits are:
|Under age 55
|Over age 55
Also, keep in mind that there are risks to getting a high-deductible health plan, even if you supplement it with an HSA. Namely, the deductible: it’s important to plan around the possibility that your out-of-pocket expenses will be high, and to have access to necessary funds in case of emergency.
If this isn’t something you can reasonably do, it might make sense to consider plans with lower deductibles, even if this raises your monthly premium. For more help, we strongly recommend consulting with your Human Resources department at work or seeking out qualified advice.
What does this have to do with retirement?
If you have the cash on hand to pay for your out-of-pocket expenses using other means, or you simply don’t have much in the way of medical expenses, your HSA can become a nifty retirement savings vehicle.
- Find a low-cost, qualified, and reputable HSA provider
- Contribute to your HSA up to the maximum annual limit
- Avoid using these funds for medical expenses (if it’s prudent and appropriate for you)
- Invest conscientiously and avoid excess transactions
- Use your HSA savings to support out-of-pocket medical expenses in retirement
You get the benefit of a tax deduction for contributions today, tax-free growth of the money in your account, and tax-free distributions for qualifying medical expenses in retirement. This is called the “triple tax advantage,” and it can be a powerful way to boost your savings.
This can also make sense on another level: even if you’re healthy today, it’s entirely likely that your healthcare spending will rise in retirement. With a supplementary pool of tax-advantaged funds at your disposal, you can potentially reduce some of the stress that healthcare tends to bring to retirement planning.
Another critical bonus? If you’re over 65 and need access to funds, you can make HSA withdrawals for non-medical expenses. In this situation, all distributions will be taxed at your standard income tax rate.
Remember to do your homework
Keep in mind that every situation is different: for some, especially those with higher medical expenses, an HSA can simply help to offset taxes today – no further benefits required. But if you are in good health, don’t need to use much of your HSA to cover medical bills, and invest wisely, there’s a chance for longer-term perks.
It’s also important to run the numbers from an accounting perspective and a basic healthcare needs point of view: in some cases, high-deductible plans simply don’t make sense. In others, using an HSA for long-term savings doesn’t bring as much to the table in terms of tax benefits.
We recommend getting qualified advice on both fronts to help you make the right decision for you and your family.
Looking for other ways to boost your retirement readiness?
If you’re in your 50s and looking to maximize your savings and preparedness for retirement, be sure to check out our free guide to retirement planning in your 50s. It’ll help you identify some of the key risk factors and strategic moves you can make today to help build the retirement of your dreams tomorrow.
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