Medical care in America doesn't come cheap. A healthy 65-year-old couple who retired in 2022 may expect to pay, on average, $ 673,587 out of pocket to cover their lifetime retirement medical expenses, even with Medicare.* Using a Health Savings Account (HSA) for retirement may help cover some of these costs.
You probably already know the familiar vehicles for savings—like a traditional IRA, Roth IRA or 401(k)—can help you with that big bill in your golden years. But an HSA might get you to that target even faster. These one-of-a-kind accounts are often overlooked for retirement savings. But they offer some advantages you won't find anywhere else.
How a Health Savings Account Works
If you're covered by a high-deductible health plan that satisfies certain IRS requirements, you may qualify for an HSA.
As an HSA owner, you contribute money to a specialized savings account, typically funded through pretax deductions from your paycheck. The funds may be kept in an FDIC-insured bank.
When you incur qualified medical expenses, you simply withdraw funds from your HSA to cover the cost. You can pay a provider directly with HSA funds or reimburse yourself after paying out of pocket. You can use your HSA to cover your health insurance deductible, prescription medications, hospital visits, appointments with your doctor, mental health services and more.
So how does this relate to your retirement? Unlike a Flexible Spending Account (FSA), your HSA balance rolls over from year to year. So the money you contribute now may be used today, next year or 30 years down the road.
Why Consider an HSA?
Health Savings Accounts offer several distinct advantages to people who own them. You may be able to shift some or all of your balance into investments of your choice directly in your HSA based on your HSA trustee's requirements and available investment options. This means you can play the long game—investing and watching your money potentially grow for years until retirement.** So, when you withdraw money later in life, you may have more cash available to cover medical costs than you originally put into your account.
Once you retire and as your medical needs increase, you may spend a good chunk of your nest egg on medical expenses. HSAs can help you meet those needs. Plus, after age 65, you can use the money on anything, whether it’s a qualified medical expense or not, without penalty.
Benefits of Using an HSA for Retirement Investing
HSAs offer several advantages over other retirement investment vehicles.
Triple tax break. You can take a tax deduction for contributions to your HSA or contribute to your HSA on a pretax basis through your employer. You pay zero in taxes on any interest and dividends you earn. And you can make withdrawals tax-free, so long as you use the funds for qualified medical expenses. Those on Medicare can't contribute to an HSA but can use previous savings for the same costs. At death, a spouse may continue receiving the preferred tax treatment with a spousal rollover.
Move your HSA. You may need to switch insurance providers when you move from job to job, but your HSA is portable and travels with you. The funds remain, and you can keep contributing so long as you're participating in a high-deductible health plan and aren't entitled to Medicare or other disqualifying coverage.
Employer contributions. Many businesses incentivize their employees to participate in high-deductible health plans by contributing directly to employees' HSAs. If you opt for an HSA-qualifying high-deductible health plan, you might receive hundreds or even a thousand dollars in free cash from your employer. You're still capped at the annual contribution max, but more of the money you save will have come from your employer.
HSA Pros and Cons for Retirement
Benefits
Flexible Contributions
Employers, relatives or anyone else may contribute to your HSA.
Contributions are not counted against 401(k)s, IRAs or other retirement account limits.
At age 55 you can make catch-up contributions.
Investment Variety
Options may include stocks, bonds, mutual funds, money markets, CDs, bank accounts and others.
Some plans offer self-directed brokerage windows.
Tax-Deductible Limits
Contributions can be made up to April 15 of the following year.
2022 contribution limits¹
Self-only: you can contribute up to $3,650 to an HSA
Family plan: you can contribute up to $7,300 for a family plan HSA
2023 contribution limits¹
Self-only: you can contribute up to $3,850 to an HSA
Family plan: you can contribute up to $7,750 for a family plan HSA
Ages 55+ are allowed an extra $1,000 in catch-up contributions each year.
¹These limits include both employer and employee contributions.
Less Constrained Withdrawals
There are no time limits for using the money and no required distributions at age 73.
After age 65, you can use the funds for any retirement expense—not just medical.²
²Before 65, non-qualified medical expenses carry a 20% penalty.
Challenges
Complex Financial Decisions
Participants find it difficult to decide between investing in a 401(k) pretax, 401(k) Roth, IRA or HSAs for retirement.
It can also be hard to project current versus future tax rates and medical expenses to know how much to save now.
Too Few or Too Many Investments
Depending on the provider, investment choices may be limited or unlimited.
Too few can hinder diversification needs.
Too many can overwhelm and lead to inertia.
Investment Hurdles
Typically, you must meet minimum thresholds before you can invest HSA money.
Investment decisions require you to consider when the funds will be used: in the short- and medium-term, in retirement, or both.
Cost Constraints
Investment prices and options tend to cost more than 401(k) plans.
Administrative fees can also be high.
Can you contribute more money annually to your HSA than the actual qualified medical expenses you might incur? Yes, the amount of your actual medical expenses does not impact how much you can contribute, which means you can save more for your future retirement years in a tax-favored account.
And unlike traditional IRAs or 401(k)s, you won't pay taxes on the earnings when you withdraw the money. Likewise, they differ from Roth IRAs and Roth 401(k)s in that you don't pay upfront taxes when you contribute the money to an HSA.
Understanding Taxes When Using Your HSA for Retirement Savings
Starting at age 65, you can withdraw funds penalty-free from an HSA for any expenses. Like an IRA, it will be taxed as income.
However, when you save for future medical costs in your HSA, you get the most bang for your buck—with no federal tax bill at any point in the process when withdrawals are used to pay for qualified medical expenses.
Instead, you get to keep that money for yourself, watching it potentially grow and enjoying the full benefit of that cash down the road.
Don't let future medical costs keep you up at night. While the amount you need for health care in retirement can be higher than most people realize, using your HSA for retirement savings can be a big help. And, if you start now, you may feel more confident about retirement.
2022 Retirement Healthcare Costs Data Report, HealthView Services, March 2022.
Performance of investments such as stocks can be volatile. Remember the importance of having enough funds to meet your medical needs, before considering investing additional funds that may benefit from an extended timeframe.
Please consult your tax advisor for more detailed information regarding the Roth IRA or for advice regarding your individual situation.
Taxes are deferred until withdrawal if the requirements are met. A 10% penalty may be imposed for withdrawal prior to reaching age 59½.
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