You grasp a health savings account (HSA) helps pay for out-of-pocket medical costs, but it may surprise you to learn that this tax-advantaged account could be a choice retirement savings vehicle, too. It has become ingrained in us that we should max out our 401(k) or other workplace defined contribution procedure as the best way to save for retirement. This is certainly good advice. But should those health-cost savings plans also be maxed out in correspond to fashion? Here is a look at what these accounts are, who can open one, and how to make the best use of an HSA for your retirement if you are fortunate reasonably to have one.
- The high-deductible health plan you need to qualify for a health savings account (HSA) may be more budget-friendly than it earmarks ofs because premiums are so low.
- Unlike a flexible spending account, your HSA money is yours forever, and it’s portable.
- You can contribute to an HSA until you note in Medicare, even when you’re not working.
- Invest your HSA money; don’t just leave it in a savings account.
- Keep counterfoils for unreimbursed medical expenses since you can use them to get tax-free funds from your HSA—even years after you incurred the expenses.
What Is a Constitution Savings Account (HSA)?
HSAs are tax-advantaged savings accounts designed to help people who have high-deductible health foresees (HDHPs) pay for out-of-pocket medical expenses. While these accounts have been available since 2004, too few unmarried Americans are taking advantage of them.
According to an Oct. 2018 report from the Employee Benefit Research Institute (EBRI), concerning 21.4 million to 33.7 million people had HSA-eligible health insurance plans in 2017, but only 22.2 million of that number had unfastened an HSA. An April 2018 survey by America’s Health Insurance Plans (AHIP) of its member insurers reported 21.8 million HSA enrollees in 52 HDHP outlines in 2017, up from 20.2 million the previous year. These types of health plans are offered by about 43% of patrons right now.
Moreover, in a later report, the EBRI noted that people with HSAs had an average balance of equitable $2,922 in 2016—a pittance, considering that the allowable annual contribution in 2020 is $3,550 (rising to $3,600 in 2021) for those with special health plans and $7,100 for those with family coverage (increasing to $7,200 in 2021).
In addition, only 6% of HSAs were in investment accounts. EBRI rest that virtually no one contributes the maximum, and nearly everyone takes current distributions to pay for medical expenses.
All of this means that consumers who take HSAs—as well as consumers who are eligible for HSAs but haven’t opened one—are missing out on an incredible option for funding their later years. It’s for the present to start a new trend.
Why Use an HSA for Retirement?
An HSA’s triple tax advantage, which is similar to that of a traditional 401(k) plan or IRA, makes it a top-notch way to protect for retirement. HSAs are “the most tax-preferred account available,” writes Michael Kitces, director of financial planning at Consummation Advisory Group Inc. in Columbia, Md. “Using one to save for retirement medical expenses is a better strategy than using retirement accounts.”
Extras of an HSA
Your contributions to an HSA can be made via payroll deductions, as well as from your own funds. If the latter, they are tax-deductible, be revenged if you don’t itemize. If they’re made from your own funds, they’re considered to be made on a pre-tax basis, meaning that they slash your federal and state income tax liability—and they’re not subject to FICA taxes, either.
Your account compare grows tax-free. Any interest, dividends, or capital gains you earn are nontaxable.
Any contributions your employer makes to your HSA do not be undergoing to be counted as part of your taxable income.
Withdrawals for qualified medical expenses are tax-free. This is a key way in which an HSA is nobler to a traditional 401(k) or IRA as a retirement vehicle. Once you begin to withdraw funds from those plans, you pay income tax on that loot, regardless of how the funds are being used.
Unlike a 401(k) or IRA, an HSA does not require the account-holder to begin withdrawing funds at a indubitable age. The account can remain untouched as long as you like, although you are no longer allowed to contribute once you enroll in Medicare. You change eligible for Medicare at age 65 and will be automatically enrolled in Parts A and B if you are already receiving Social Security.
What’s multitudinous, the balance can be carried over from year to year; you are not legally obligated to “use it or lose it,” as with a flexible spending account (FSA). An HSA can shift with you to a new job, too. You own the account, not your employer, which means the account is fully portable and goes when and where you do.
Who Can Outstretched an HSA?
To qualify for an HSA, you must have a high-deductible health plan and no other health insurance. You must not yet qualify for Medicare, and you cannot be claimed as a dependent on someone else’s tax deliver.
A primary concern many consumers have about foregoing a preferred provider organization (PPO), health maintenance organism (HMO) plan, or other health insurance in favor of a high-deductible health plan is that they will not be able to be able their medical expenses.
In 2020, the deductible for an HDHP is at least $1,400 for self-only coverage and $2,800 for family coverage (they debris the same in 2021). Depending on your coverage, your annual out-of-pocket expenses in 2020 could run as high as $6,900 for distinctive coverage—or $13,800 for family coverage—under an HDHP (increasing to $7,000 and $14,000, respectively, in 2021). High expenses can be one persuade these plans are more popular among affluent families who will benefit from the tax advantages and can afford the chance.
However, according to Fidelity, a lower-deductible plan such as a PPO could be costing you more than $2,000 a year in extreme premiums because you’re paying the extra money regardless of the size of your medical expenses that year. With an HDHP, by juxtapose, you’re spending more closely matches your actual healthcare needs.
Of course, if you know your healthcare charges are likely to be high—a woman who is pregnant, for instance, or someone with a chronic medical condition—a health plan with a outrageous deductible may not be the best choice for you. But keep in mind that HDHPs completely cover some preventive care worship armies before you meet your deductible.
All in all, an HDHP might be more budget-friendly than you think—especially when you take into its advantages for retirement. Let’s take a look at how you could be using the features of an HSA to more easily and more robustly fund your retirement.
Max Out Contributions by Age 65
As introduced above, your HSA contributions are tax-deductible until you sign up for Medicare. The contribution limits of $3,550 (self-only coverage) and $7,100 (ones own flesh coverage) include employer contributions. The contributions limits are adjusted annually for inflation.
If you have an HSA and you’re 55 or older, you can descry an extra “catch-up” contribution of $1,000 per year and a spouse who is 55 or older can do the same, provided each of you has your own HSA account.
You can have a hand in up to the maximum regardless of your income, and your entire contribution is tax-deductible. You can even contribute in years when you contain no income. You can also contribute if you’re self-employed.
The contribution limit for a family health savings account in 2021. The contribution limit for a self-only HSA is $3,600.
“Maxing out contributions ahead of age 65 allows you to save for general retirement expenses beyond medical expenses,” says Mark Hebner, down and president of Index Fund Advisors Inc. in Irvine, Calif., and author of “Index Funds: The 12-Step Recovery Program for Functioning Investors.”
“Although you will not receive the tax exemption,” Hebner adds, “it gives retirees more access to more resources to ready general living expenses.”
Don’t Spend Your Contributions
This may sound counterintuitive, but we’re looking at an HSA primarily as an investment ornament. Granted, the basic idea behind an HSA is to give people with a high-deductible health plan a tax break to make their out-of-pocket medical expenses various manageable.
But that triple tax advantage means that the best way to use an HSA is to treat it as an investment tool that will mend your financial picture in retirement. And the best way to do that is to never spend your HSA contributions during your fashion years and pay cash out of pocket for your medical bills.
In other words, think of your HSA contributions the same way you over of your contributions to any other retirement account: untouchable until you retire. Remember, the IRS does not require you to take dispensations from your HSA in any year, before or during retirement.
If you absolutely must spend some of your contributions earlier retirement, be sure to spend them on qualified medical expenses. These distributions are not taxable. If you are forced to spend the paper money on anything else before you’re 65, you will pay a 20% penalty and you will also pay income tax on those funds.
Instal Your Contributions Wisely
The key to maximizing your unspent contributions, of course, is to invest them wisely. Your investment blueprint should be similar to the one you’re using for your other retirement assets, such as a 401(k) plan or an IRA. When deciding how to inaugurate your HSA assets, make sure to consider your portfolio as a whole so that your overall diversification scheme and risk profile are where you want them to be.
Your employer might make it easy for you to open an HSA with a minutia administrator, but the choice of where to put your money is yours. An HSA is not as restrictive as a 401(k); it’s more like an IRA. Since some administrators just let you put your money in a savings account, where you’ll barely earn any interest, make sure to shop around for a sketch with high-quality, low-cost investment options, such as Vanguard or Fidelity funds.
How Much Could You Receive?
Let’s do some backward math to see how handsomely this HSA savings and investment strategy can pay off. We’ll use something close to a best-case scenario and say that you’re currently 21, you command the maximum allowable contribution every year to a self-only plan, and you contribute every year until you’re 65. We’ll pretend to that you invest all your contributions and automatically reinvest all your returns in the stock market, earning an average annual replace of 8% and that your plan has no fees. By retirement, your HSA would have more than $1.2 million.
What relating to a more conservative estimate? Suppose you’re now 40 years old and you only put in $100 per month until you’re 65, earning an mediocre annual return of 3%. You’d still end up with nearly $45,000 by retirement. Try out an online HSA calculator to play with the billions for your own situation.
Maximize Your HSA Assets
Here are some options for using your accumulated HSA contributions and investment amends in retirement. Remember, distributions for qualified medical expenses are not taxable, so you want to use the money exclusively for those expenses if realizable. There are no required minimum distributions, so you can keep the money invested until you need it.
If you do need to use the distributions for another avail, they will be taxable. However, after age 65, you won’t owe the 20% penalty. Using HSA assets for purposes other than capable medical expenses is generally less detrimental to your finances once you’ve reached retirement age because you may be in a lower tax classify if you’ve stopped working, reduced your hours, or changed jobs.
In this way, an HSA is effectively the same as a 401(k) or any other retirement account, with one key variation: There is no requirement to begin withdrawing the money at age 72. So you don’t have to worry about saving too much in your HSA and not being skilled to use it all effectively.
Timing Is Everything
By waiting as long as possible to spend your HSA assets, you maximize your potential investment interests and give yourself as much money as possible to work with. You’ll also want to consider market fluctuations when winning distributions, the same way you would when taking distributions from an investment account. You obviously want to avoid rat on investments at a loss to pay for medical expenses.
Choose a Beneficiary
When you open your HSA, you will be asked to designate a
Pay Healthfulness Expenses in Retirement
Fidelity Investments’ most recent Retirement Health Care Cost survey calculates that the
Indemnify Yourself for Expenses
With an HSA you are not required to take a distribution to reimburse yourself in the same year you incur a particular medical expense. The key limitation is that you can’t use an HSA equalize to reimburse yourself for medical expenses you incurred before you established the account.
So keep your receipts for all healthcare expenses you pay out of steal after you establish your HSA. If, in your later years, you find yourself with more money in your HSA than you comprehend what to do with, you can use your HSA balance to reimburse yourself for those earlier expenses.
Warnings About HSA Retirement Use
The schemes described in this article are based on federal tax law. Most states follow federal tax law when it comes to HSAs, but yours may not. As of the 2019 tax year,
The Posterior Line
A health savings account, available to consumers who choose a high-deductible health plan, has been largely overlooked as an investment medium, but with its triple tax advantage it provides an excellent way to save, invest, and take distributions without paying taxes.
The next pass you’re choosing a health insurance plan, take a closer look at whether a high-deductible health plan might free for you. If so, open an HSA and start contributing as soon as you’re eligible. By maximizing your contributions, investing them, and leaving the balance untouched until retirement, you’ll construct a significant addition to your other retirement options.
Of course, you can’t let the savings tail wag the medical dog. Hoarding your HSA monies willingly prefer than attending to your health is not recommended. However, if you’re financially able to use post-tax dollars for your current healthcare payments while saving your pre-tax HSA dollars for later, you could build a nice nest egg for your use in retirement.