Using a Health Savings Account (HSA) for Medical and Retirement Planning
A Health Savings Account (HSA) is a very beneficial tool that you can use in your retirement planning. You can use these accounts for your medical needs, but there is a lot of information that people don’t realize that an HSA offers.
We’re going to go over 10 things about an HSA that can help you when you’re trying to secure your retirement.
10 Things to Know About a Health Savings Account (HSA)
1. Tax Advantages
A crucial benefit of an HSA is that it has many tax advantages attached to it. The HSA works by contributing through an employer plan or an individual plan.
When you contribute to the plan, you receive a tax deduction. The deduction can help you stay in a lower tax bracket, but there are limits as to how much you can put into one of these accounts.
In 2023, a solo plan that is HSA-eligible (be aware of this when signing up for a plan) has a $3,850 contribution maximum. You can receive up to a $3,850 deduction on your taxes as a result.
If you have a family, the maximum contribution this year is $7,750.
Anyone 55 or older can contribute an additional $1,000 per year as a catch-up benefit.
You can also contribute at the tax deadline.
2. Triple Tax Savings
More tax savings? HSAs are a great option in retirement planning because they really offer what is known as “triple tax savings.” You receive a tax benefit by:
- Putting money into the HSA to reduce income tax
- Allowing funds to grow tax-free
- Paying down medical expenses without paying taxes
If you need to buy something for a medical reason, you don’t have to pay taxes either. When using an HSA for medical reasons, it offers great tax advantages.
3. Lowers Healthcare Costs
An HSA can lower your healthcare costs. These plans are designed for high-deductible health insurance plans. Since you don’t have as much coverage from the insurer, they allow you to open an HSA and save money on your monthly health insurance premiums.
A high-deductible plan with an HSA may make sense if you are relatively healthy and don’t go to the doctor often, or you are younger (and healthy).
HSAs with a high deductible plan will make sense to lower insurance costs, but these plans are certainly not for everyone. You’ll need to review your own circumstances and really figure out if a high-deductible plan is better for you or not.
4. Portable and Long-term Savings
An HSA is a health savings account that may be offered by an employer, but it is a portable savings option that you can transfer. The account is owned by you and can be transferred regardless of your employer or insurer.
You can use the funds in the account if necessary or opt not to if you like.
5. Investment Opportunities
While not all HSAs offer investment options, others do. For example, Murs has an HSA through his credit union that acts like a savings account and offers a standard interest rate – something along the lines of 2%.
However, his wife has an HSA through her employer that allows her to:
- Invest the funds in the account
- Earn higher interest as a result
If you can grow the account over time, you can enjoy tax-free distributions in the future. This tax-free growth is crucial and one of the reasons we recommend considering an HSA as a retirement planning tool.
6. Flexibility and Control
An HSA is optional and not a requirement, but you must use it for medical expenses whenever possible to fully reap the benefits of tax-free withdrawals. There are many instances where you can use an HSA for medical expenses, for example, should you go to the hospital:
- You can use the HSA for your deductible – or not
- You can use the HSA for the co-pay – or not
It is worth restating that using an HSA for medical expenses can be a great choice to expand your tax benefits.
You can use your HSA for any medical-related expenses that fall within the rules. If you find yourself in a long-term care situation, you can use funds in the HSA for the co-pay.
Note: Many HSAs offer a debit card that you can use, much like your normal bank debit card.
7. Pretax Contributions Through Payroll Deductions
If you’re an employee, you know that you can have contributions taken from your paycheck sent straight into a 401(k). You can use the same payroll deduction for an HSA, which allows you to set and forget your HSA contributions.
8. No Use It or Lose It Rule
Unlike a Flexible Spending Account (FSA), there are no provisions that require you to use the money in the HSA. If you contribute $3,000 a year, you’ll have over $30,000 in the account in ten years if you don’t use the funds.
You never lose the funds that you put into the account.
9. Retirement Savings Vehicle
We view an HSA as a retirement planning vehicle, and it’s something that we use a lot with our clients. When we use an HSA as part of our client’s retirement focused plan, we make sure:
- To contribute up to the maximum family amount of the HSA
- The goal is to not touch the HSA for as long as possible
Of course, if you need the money in the HSA, you should use it. If you don’t need to use the money, you can keep contributing to it and invest it over time. We can pay medical expenses out of pocket, but at some point when we’re close to retirement, we’ll begin using this account for:
- Tax-free expenses
- Any purpose after age 65
If you don’t use the withdrawal for medical expenses, you will be taxed on the withdrawal. When you use the HSA for health-related expenses that fall within the requirements, it’s a nice tax-free deduction.
10. Control Over Your Healthcare Decisions
Insurance companies have a way of telling you what you can and cannot spend money on with your healthcare. HSAs can expand your options by:
- Saving money on healthcare premiums
- Allowing you consider having a non-generic prescription filled
- Choosing how and when you use the money in your HSA
If you’re trying to secure your retirement or are in the middle of retirement planning and want to learn more about how you can use a Health Savings Account, feel free to reach out to us.