As you plan for retirement, one important tool to consider is a health savings account, or HSA. While HSAs are most frequently used to pay medical costs, they also provide an array of investment options and tax advantages that can give your finances a serious boost once you’ve retired.
What is an HSA?
An HSA is a savings tool that lets you set aside tax-free money for a wide range of health-related expenses. To fund it, you simply make pre-tax contributions up to a set annual limit (for the 2023 tax year, this will be $3,850 for individuals and $7,750 for families). Unlike other health savings tools, an HSA doesn’t require you to spend what you’ve saved each year. You can let savings accrue for when you need them, and many HSAs also give you ways to invest your balance like you would with a 401(k) or IRA.
Who is eligible to open an HSA?
To open an HSA, you need to be enrolled in a high-deductible health insurance plan, whether through your employer or through the Affordable Care Act. For 2023, the federal government defines “high deductible” as a minimum of $1,500 for individual coverage or $3,000 for family coverage. Once you’re enrolled in Medicare and drawing Social Security (at age 65 or older), you’re no longer eligible to open or contribute to an HSA.
An HSA’s triple tax advantage
An HSA provides three major tax advantages. First, your contributions are tax-deductible. Second, any funds you invest will grow on a tax-deferred basis. Third, you can withdraw money tax-free if it’s used for eligible health spending (however, if you use it for other expenses, you’ll incur a 20% penalty). For retirees, there’s a fourth benefit: Money you withdraw for non-health spending is taxed like regular income instead of being subject to a penalty.
Saving for retirement with an HSA
If used properly, an HSA can be a powerful tool for supercharging your retirement savings. According to Kiplinger contributor Kevin Webb, in order to take full advantage of an HSA’s tax benefits in retirement, you’ll need to treat it as more of a long-term savings vehicle, letting your contributions grow rather than withdrawing them for health expenses. You’ll also need to choose an HSA option that allows you to invest what you contribute, then fund it to the annual limit as often as possible. Once you reach age 55, you can fund your HSA with an additional $1,000 per year.
How retirees can use HSA money
As a retiree, you’ll be able to use HSA funds in variety of ways. You’ll also have unlimited time to use them — unlike with other retirement accounts, you don’t have to take minimum distributions. Instead, you can leave the money alone until you need it. This gives you a pool of tax-free funds to use for all sorts of health expenses, which tend to go up dramatically with age. In an article for Investopedia, Amy Fontinelle notes HSA money can be used to pay for everything from prescription medications and wheelchairs to hospital visits and nursing home stays. If you’ve saved receipts, you can even use HSA money to reimburse yourself for medical expenses you paid for out of pocket years ago. As previously mentioned, you can also spend HSA money on non-health expenses, but your withdrawals will be subject to normal tax rates.
When utilized properly, an HSA can place you several steps closer to your retirement savings goals. Consult with a financial professional to determine whether an HSA makes sense for your needs and situation.