Do you or your spouse have a Health Savings Account (HSA)?
We’ve talked about the benefits they offer before. If you’re nearing retirement, here are three things that you’ll want to avoid if you’re trying to maximize the benefits of these savings accounts:
1. Not Buying Insurance With Your HSA
Sure, you can use the funds in your HSA to pay for qualified medical expenses—think co-pays and vision and dental expenses— but if you use HSA funds to pay for qualified medical costs, you won’t be able to claim those costs as itemized deductions.
Instead, you can also use your HSA to pay for certain insurance premiums. These include COBRA premiums, long-term care insurance premiums, and, if you’re 65 or older, Medicare. However, Medigap premiums are NOT eligible expenses.
Request a no-cost, no-obligation advisor consultation today!Get Started
2. Being Penalized Through Retroactive Social Security enrollment
If you wait until you reach full retirement age to claim your Social Security benefit, you’ll be given a choice to receive a lump sum of retroactive benefit that dates back six months.
But wait! If you choose to take that lump sum, that means you also have chosen to sign up for Medicare retroactively. And that may be a problem if you’ve been making regular HSA contributions–because you can’t do both. Contributing to your HSA while enrolled in Medicare leads to excess contributions.
If this happens, you’ll need to withdraw the amount of excess contribution you’ve made before Tax Day, and they will be included in your taxable income, OR you’ll pay a 6% excise tax for every tax year the excess contributions remain in your account. Ouch.
3. Using Your HSA to Pay for Non-Medical Expenses
If you withdraw money from your HSA for non-qualified medical expenses before you turn 65, be prepared to pony up 20% for the withdrawal penalty, which is more than the 10% early withdrawal penalty from IRAs and 401(k) plans. You’ll pay the penalty PLUS regular income taxes on the withdrawn amount.
If you’re over 65, you’ll still have to pay income taxes on non-qualified HSA withdrawals, but you won’t have to deal with the 20% penalty.
Even with these restrictions and caveats, the HSA is an incredible retirement planning tool. If you’d like to learn more about how it can fit into your financial plan, click here to set up a free call with one of our advisors.