So you have a 401(k) and an IRA. You have the Roth versions of these retirement accounts as well, and you have a brokerage account. Is there anything else you can do to increase your retirement savings?
Yes, there is! If you have access to a health savings account (HSA), you have access to a highly flexible, tax-advantaged savings account that you can use in retirement.
Read on to find out why our Plantation, Florida fiduciary wealth management firm generally recommends contributing to an HSA.
The Triple Tax Benefits of a Health Savings Account
Like your 401(k) or IRA, you can make tax-advantaged contributions to an HSA. If you have an HSA through your employer, you’ll reduce your taxable income by making pre-tax contributions to your health savings account. (Plus, your employer might match your contributions, increasing your balance.)
If you have an HSA on your own, your contributions are tax-deductible in the year you make them.
Regardless of whether you contribute through your workplace or on your own, your contributions grow tax-deferred. And unlike a flexible spending account (FSA), your contributions can grow from year to year. The HSA lacks the “use it or lose it” requirements of an FSA.
You owe no federal taxes as long as you use your HSA savings to pay for qualified medical expenses. (Check with your state to make sure you understand its rules.) If you use the HSA balance on non-health expenses before age 65, you face federal income taxes and a 20% penalty on the withdrawal.
However—and this is what makes the HSA a powerful tool in retirement—the penalty is eliminated once you reach 65. So, just like your traditional IRA or 401(k), you just pay income taxes on any distributions that you don’t use for qualified health expenses.
Now, you may decide to use your HSA for only health care expenses. And with today’s retiring couples facing an estimated $300,000 in health care costs over the rest of their lives, that decision is a smart one.
But the fact that you can use your HSA similarly to your IRA or 401(k) adds flexibility to your retirement savings strategy.
What’s more, unlike your traditional retirement accounts, you won’t face required minimum distributions (RMDs) with your health savings account. You can let your HSA savings sit in the account if you want without being forced to take a distribution.
An HSA provides other uses as well. Normally, you can’t use an HSA to pay for insurance premiums. However, if you stop working before age 65, the age you would enroll in Medicare, you can use HSA funds to pay for health care coverage while receiving unemployment benefits or for health care coverage through COBRA.
Once you reach age 65, you can use your HSA to pay for Medicare Parts B and D premiums, though not for a Medicare supplemental policy like Medigap. And finally, you can use your HSA to help cover costs for a ”tax-qualified” long-term-care insurance policy. As you age, the amount the HSA can cover increases.
How to Contribute to an HSA
You can contribute to a health savings account if you have a high-deductible health plan. For 2021, that would be a plan with a $1,400 minimum deductible for self-only coverage and $2,800 for family coverage.
Also for 2021, you can contribute up to $3,600 for a self-only HSA and $7,200 for a family HSA. If you are age 55 or older, you can contribute an additional $1,000 as a catch-up contribution.
Assuming your plan provider offers the option, consider investing your HSA funds rather than keeping them in cash. By investing your contributions, you take advantage of the power of compounding, giving your HSA balance a chance to grow, much like your 401(k) or IRA balance is growing. Just make sure that your HSA investments are in line with your risk tolerance and return goals and that your HSA fees and expense ratios are reasonable.
The above investment strategy assumes you plan to wait to use your HSA in retirement, paying for health care costs out of pocket before then. If you want to use your HSA for current expenses as well, determine an appropriate amount to earmark for cash versus investing all your contributions.
If you have questions about how an HSA fits into your retirement planning, give us a call!
Schedule a complimentary consultation with one of our fee-only financial planners to discuss your personal situation.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.