How to use an HSA as a retirement savings tool
There are a wide range of plans to help save for retirement. But one type of plan is ideally suited to serve a dual purpose: a Health Savings Account (HSA).
A tax strategy
HSAs were created in 2003 primarily as a tax-advantaged strategy for those covered by high-deductible health plans to save money for medical expenses. To open an HSA, you must be covered by a health insurance plan with a deductible of at least $1,250 for an individual plan or $2,500 for a family plan.
Pairing a high-deductible plan with an HSA allows you to contribute up to $3,300 ($6,550 for a family plan) to the account, and reduce your taxable income for doing so. If you’re 55 or older, you can contribute an additional $1,000.
As long as the money is used for qualified medical expenses, it can be withdrawn from your HSA at any time — before or after your retirement — tax- and penalty-free. But if it’s used for nonmedical expenses and you’re under age 65, you’ll be assessed a 20% penalty and taxed on withdrawals at your current ordinary-income tax rate.
The key aspect of HSAs that could enable you to use one to save for retirement is the fact that unused HSA funds roll over from one year to the next. So if you’re relatively healthy and don’t have to withdraw much from your HSA before retiring, you could accumulate a sizable balance that could help supplement your other retirement savings accounts.
Potential tax consequences
As mentioned above, there’s one drawback to this strategy: While funds withdrawn from an HSA for nonmedical expenses after age 65 aren’t subject to penalty, they will be taxed at your ordinary-income tax rate. So if you use HSA funds to help meet everyday living expenses in retirement, instead of using them to meet medical expenses, you’ll lose the benefit of tax-free withdrawals.
Consider the fact that you never really know when you might suffer a serious illness or injury and need to tap your HSA for medical needs before retirement. Viewing your HSA funds as retirement funds could give you a false sense of retirement financial security. It is important, therefore, to view an HSA as a supplement to — and not a substitute for — other retirement savings.
It’s worth noting that, for many people, health care expenses may rise drastically during retirement. For example, many retirees are faced with major health care costs not fully covered by Medicare, such as assisted living or nursing home care, physical therapy, and major surgeries, to name just a few. An HSA is an effective way to save tax-free for these possible health care expenses in retirement.
Be sure to talk with a financial planning and tax expert to help you decide the best retirement and health saving strategies for you and your family.
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