There are many vehicles for retirement savings, from traditional pensions and company 401(k) plans to regular and Roth IRA plans. But there is another way to save for retirement, one that is still underutilized and not widely understood. This article will cover how you can use health savings account for retirement.
If you have never thought about a health savings account (HSA) as part of your retirement planning portfolio, you might want to give this unique tax-advantaged vehicle another look.
It is easy to see why the health savings account would be overlooked in the world of retirement planning. After all, the name does mention health savings, but not the word retirement. So what makes a health savings account such a powerful tool for retirement planning? Why should you include one as part of your financial planning process?
Here are some of the advantages an HSA can bring to the retirement planning table.
You Get Triple Tax Benefits with an HSA
It is not often the Internal Revenue Service gives you a tax break, let alone three tax breaks in one. Yet, that is precisely what happens when you open or contribute to a health savings account. These products are unique for many reasons, including their triple tax benefits, and those savings are too significant to ignore.
You get your first tax break when you write the check for the initial HSA contribution. Just keep track of the amount and retain the payment receipt for your records. You can then write off the contribution when you file your tax return. As long as you qualify for a health savings account, the money you contribute will be deducted from your taxable income. This gives you the first of three big tax breaks.
The second tax break occurs as the money you contribute grows over time. Whether the funds are deposited in an ultra-safe savings account or invested in the stock market, the earnings will accumulate without being taxed.
Those two tax breaks are enticing enough, but there is a third tax incentive on the table. If you need to withdraw the funds for qualified healthcare expenses, you will not pay taxes on those withdrawals. This is perhaps the most amazing of the three tax benefits.
HSA Funds Can Be Used for Medicare Plan Payments
Your health insurance will likely be tied to your employment during your working years; but you will need to figure out the best path forward when you get ready to retire. If you are 65 years of age or older, that path will undoubtedly include Medicare coverage. The issue is that government-sponsored program only covers part of your costs.
Fortunately, you can use your accumulated HSA funds to purchase Medicare supplement insurance. By paying the premiums out of your savings, you get another tax benefit. Health care expenses are a big deal for retirees, so knowing that piece of the puzzle is taken care of can be very reassuring.
Premium Savings Are Built In
Not everyone can open or contribute to a health savings account; to qualify, you must first have a high-deductible health plan, or HDHP, in place. The rules governing what is and is not, a high-deductible plan can change from year to year, so check with your tax advisor or health insurance broker for current qualifications.
Signing up for a high-deductible health plan will qualify you for a health savings account and all the benefits the plan has to offer; but it will do more than that. The trade-off for accepting that higher deductible is that you get lower premiums. You can use those savings to pad your emergency fund or boost your savings.
This strategy is not right for everyone, of course. Those with chronic health conditions and high healthcare expenses may find a high-deductible plan unaffordable even with the lower premiums, so it is essential to run the numbers and do the calculations carefully before signing up.
HSA Investment Options Are Available
While the original purpose of the health savings account was to pay deductibles and other out-of-pocket expenses, the way people use them has changed and evolved over the years. The health savings account's attractive nature includes the relatively high contribution limits, the triple tax benefits, and the generous withdrawal terms. This has led many people to use them as adjunct investment vehicles.
Many brokerage firms, mutual fund companies, and banks allow health savings account owners to invest part of their funds. This flexibility makes these accounts even more potent as retirement planning vehicles. As the balance increases, allocating a small portion of the funds to a low-cost mutual fund can be a great way to maximize the long-term returns of these powerful savings and investment vehicles.
Withdrawals Are Easy
If you plan to use your health savings account as a vehicle for retirement savings, you may not touch the money for years or even decades. Throughout all that time, the funds will be accumulating through regular contributions, tax-advantaged growth, and the solid performance of the investments you have chosen.
Those are powerful incentives to keep the money in place, but the process should be straightforward if you need to use it. Withdrawals for allowable healthcare expenses are just a check or a debit card away, making it easy to use the funds you have so diligently put away. You can even pay your doctor or pharmacy directly through your health savings account. This makes it even more straightforward to use your accumulated HSA funds.
Annual Contribution Limits
As stated, if you have a High Deductible Health Plan (HDHP) you can contribute a set amount annually to your HSA. For 2021, individuals can contribute $3600, while families can contribute $7200. Is is important to check current IRS HSA publication for the annual limits for any given year. It typically is adjusted up each year to account for inflation.
In Summary
Health savings accounts have always been a great deal, but they have become more enticing over the years. These popular accounts have grown past their original uses. They are transforming themselves from glorified emergency funds into full-fledged and desirable retirement planning vehicles. If you do not yet have a health savings account, why not make this the year you start your annual contributions?