Everyone knows about 401(k) plans and IRAs, but those with a high-deductible health plan (HDHP) have another option for building savings for retirement: the Health Savings Account (HSA).
Some employers that provide high-deductible health plans for their employees offer HSAs as well. More generous employers will even match your contributions or make direct contributions to your account even if you don’t.
If you don’t get an HSA from your employer, HSAs are offered by many financial institutions. This tool can help you find the best HSA provider for you.
What are the benefits of an HSA?
HSAs offer three big tax benefits:
- Contributions to an HSA are tax-deferred like those of a pretax retirement account such as a 401(k), reducing your taxable income.
- Earnings on the investments in your HSA grow tax-free and are not subject to capital gains taxes.
- Withdrawals for qualified medical expenses are also tax-free.
This year, you can contribute up to $3,500 if you’re single (or up to $7,000 for families). If you’re 55 or older, you can put in another $1,000.
Additionally, you can be reimbursed by your HSA for out-of-pocket expenses from previous years as long as the HSA was already established when the expenses were incurred – just be sure to save your receipts! Let’s say you opened your HSA in 2007 and paid out of pocket that year for a medical procedure. Now, in 2019, you can receive reimbursement for it from your HSA if you submit a claim with the receipt.
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Are there limitations?
As is the case with other special purpose savings vehicles, HSAs are subject to specific limitations.
First, if you take money out for non-qualified expenses, you’ll have to pay regular income tax on it. And if you’re under 65, you’ll also pay a 20% penalty.
Second, you may no longer contribute to your HSA after you begin collecting Social Security.
Third, you must give some thought to your investment strategy in your HSA. Most HSAs offer a menu of mutual funds or exchange traded funds (ETFs) in which you may invest. You should consider your risk tolerance and time horizon when picking funds for your HSA.
So how does contributing to an HSA help save for retirement?
In addition to out-of-pocket expenses, retirees are able to use their HSA to pay for Medicare deductibles, prescription copays, and long-term care insurance premiums. That last one is particularly important since Medicare doesn’t cover long-term care.
That’s why some financial advisors say that HSAs should be a major component of their clients’ retirement plans. A few even tell their clients to max out their HSAs each year before contributing to other accounts.
Pre-retirees in good health and those that can pay their current medical pills out-of-pocket stand to benefit the most from contributing to an HSA as the money can sit in the account until its needed, even if that’s decades from now. The more money you have in your HSA when you begin taking Social Security and are no longer able to contribute, the longer you won’t have to pay out-of-pocket for your healthcare expenses in retirement.
How to get started
If you’re not yet retired and want to explore how an HSA can fit into your retirement plan and Social Security strategy, one of our advisors can help. Get started by requesting a free, no-obligation consultation today.