A health savings account (an HSA) is a form of tax-advantaged retirement account designed for healthcare spending. You can make contributions to your account at any time so long as you aren’t enrolled in Medicare. During any period when you are enrolled in Medicare, you cannot make contributions to a qualified HSA. If you have other questions about retirement savings and healthcare, it may be a good idea to talk to a financial professional who can help you plan. A financial advisor can play such a role, and SmartAsset’s free advisor matching tool can match you with advisors that serve your area.
What Is an HSA?
A health savings account (HSA) is a tax-advantaged retirement account that shares features of both a 401(k), an IRA and a Roth IRA. Like a 401(k) and IRA, the money that you contribute to a HSA is fully tax deductible. You don’t pay federal or state income taxes on this money, and can even deduct it from your payroll (FICA) taxes.
You can build an HSA either individually or through your employer. With an individual plan you would make contributions yourself, then make the relevant deductions on your end-of-year taxes. With an employer plan, your payroll department could make HSA contributions and tax adjustments in the same way that they do with a 401(k). Employers who run an HSA program can also make contributions for their employees.
In addition, like a Roth IRA, withdrawals from an HSA are tax-free so long as you use the money to pay for a qualified medical expense. This includes all of the account’s gains over time, meaning that you have a pool of completely untaxed money available for medical spending.
After age 65 you can withdraw money from an HSA for any reason without incurring a penalty. However, if you spend the money on non-medical expenses you will have to pay taxes on your withdrawals in the same manner that you would with an IRA or a 401(k) plan. This structure has made health savings accounts potentially popular as a retirement vehicle for qualifying individuals. (That said, both health and financial experts generally do not recommend this program overall, for reasons explained below.)
Essentially an HSA offers all of the advantages of a 401(k) and an IRA, while having the additional benefit of eliminating taxes entirely from health-related spending. However, if you withdraw money before age 65 and spend it on non-healthcare expenses, you are subject to both income taxes and an additional tax penalty.
When Can You Contribute to an HSA?
To contribute to an HSA you must meet three criteria:
- You must not be enrolled in Medicare;
- You must not be claimed as a dependent on someone else’s taxes;
- You must be enrolled in a qualifying high-deductible health insurance plan with no other form of health insurance.
You never lose access to your health savings account. The money is yours, subject only to any form of early withdrawal penalties depending on how you use it. However, if any of those three criteria change, you can no longer continue making contributions to this account.
Medicare enrollment means that most people cannot continue making contributions to their HSA once they retire. At 65 you are eligible to receive Medicare, and most (if not all) Social Security recipients are automatically enrolled in this program. Once you enroll, you cannot make additional health savings account contributions.
Someone who wants to keep making contributions after retirement can do so by either not enrolling in Medicare or by withdrawing from the program. While rare, both are options. However, it is unlikely that this would make sense financially. In most cases Medicare offers more in terms of dollar value than a health savings account would.
At time of writing, the IRS defined a high deductible insurance plan as one with a deductible of at least $1,400 for an individual or $2,800 for a family. These amounts are adjusted periodically to account for inflation. If you have a healthcare plan with lower deductibles, or if you are uninsured, you cannot contribute to a health savings account.
Due to the high-deductible insurance requirement a number of healthcare and financial experts consider HSAs a bad idea for many individuals. The tax advantages of this program are excellent, so in a vacuum a health savings account could help with retirement planning.
When Is an HSA a Good Idea?
For most people, the best-case use for a health savings plan is when you’re young. A healthy adult in their 20s can often afford to enroll in a high-deductible plan, since their medical needs are often defined by catastrophic risk rather than routine maintenance. This person can make health savings account contributions during their so-called “young invincible” years. Eventually they will phase into a more comprehensive healthcare plan and no longer will be allowed to make contributions to the HSA, but they keep access to the account. That money can grow throughout their adult years and provide a supplemental retirement fund when the time comes.
For someone who does have a high-deductible plan, contributing to an HSA is a great option. However, if you have the means, you are usually better off enrolling in a more comprehensive health insurance plan and losing access to the HSA program.
You can contribute to a health savings account after you retire, so long as you are not enrolled in Medicare. If you are enrolled in Medicare you cannot contribute to a health savings account, but there are other ways of saving for expected and unexpected healthcare costs. Try to make sure that you’re prepared for any and all healthcare expenses that could come your way.
Tips for Saving for Retirement
- Retirement saving can be easier when you have a financial professional to work with. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Retirement planning is a complicated project. Between tax-advantaged accounts, Social Security, personal assets and more, this takes real work. SmartAsset has you covered with free online resources that can help. Try using our free retirement calculator today.
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