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Benefits of Using an HSA for Retirement


There is a variety of tools that can help you save for retirement. While many of us know about 401(k)s and IRAs, not as many may be familiar with health savings accounts (HSAs). These are savings accounts designed for people with high-deductible health plans. Funds from an HSA account can cover qualified medical expenses and come with the additional perk of tax advantages. Because of this and other benefits retirees may benefit from owning an account. Here are ways you can make your HSA work for you in retirement.

For help with HSAs and other retirement planning accounts and strategies, consider working with a financial advisor.

What Is an HSA?

An HSA is a type of savings account where you can put pretax funds to pay for qualified medical expenses. While that generally doesn’t include premiums, you can use those untaxed dollars for coinsurance, copayments and deductibles (among other expenses).

You are required to have a high deductible health plan (HDHP) to qualify for an HSA. An HDHP often comes in the form of a health plan that covers a minimum amount of preventive services prior to the deductible. If you are searching for plans in the Marketplaces, you can find out if they’re eligible for an HSA when you view them.

You can open your own HSA through certain financial institutions or through your workplace. The latter allows you to make contributions via payroll deductions. But the ability to contribute stops after you enroll in Medicare, so it’s important to max it out before then.

As long as you have an HDHP, you are eligible for an HSA account. Once you have one, you decide how much money you contribute to it. However, you must abide by the government’s maximum limits. The HSA contribution limits for 2022 are $3,650 for an individual account and $7,300 for a family account that individuals under 55 years old own. Although, after 55 you can make annual catch-up contributions worth $1,000 more. These limits apply to the total amount of contributions from both the employee and employer.

The money you contribute gets excluded from your taxable income, lowering your potential tax bill. This does not apply to excess contributions, though, which incur a 6% tax and cannot be deducted from taxes. The distributions from your HSA are tax-free when you use them for qualified medical expenses. This typically requires you to prove your expenses with receipts. Or, if your HSA provided a debit card, you can use that instead. But you don’t have to worry about any unused funds since the account has an annual rollover.

Benefits of HSAs for Your Retirement

HSAs come with three tax advantages that put them ahead of other savings or investment accounts. That includes: income tax-free contributions, income tax-free qualified withdrawals and income tax-free investment growth and interest earnings. With that as the basis for an HSA account, they offer a range of benefits. Here’s how you can use them to your advantage during retirement.

Designate HSA Funds for Healthcare Costs

You probably know what it’s like to save money for a financial goal. Maybe you opened a 529 savings account for a child’s college expenses. Or perhaps you stockpiled paychecks to purchase a new car. Based on the goal you had, or still hold and its time horizon, you adjusted your savings style.

Healthcare can be expensive, especially the older you get. Potential hospital bills, medical procedures, prescription medication and nursing home costs could hit at any time or sooner than you think. That’s why it’s important to stockpile funds for a nest egg now.

According to Fidelity’s Retiree Health Care Cost Estimate, a typical retired 65-year-old couple in 2021 may need around $300,000 (post-tax) for retirement healthcare costs. With that in mind, saving assets to cover healthcare is a vital step in retirement planning. Because of that, you’ll want to ensure you put away enough funds in your HSA specifically for medical care.

Capitalize on Compound Interest by Investing HSA Funds

Benefits of Using an HSA for Retirement

Healthcare is a consistent cost we need to think about. But even if you see your medical bills rising in the future, you don’t need to panic. You may just have to find ways to bulk up your savings. One way to do that is by developing an investment strategy early on. Examine the funds you intend to put away into your HSA. Instead of contributing all of the money, consider putting some aside for investing purposes. By dedicating a portion of your cash for possible tax-free growth, you can give your retirement better financial footing.

There are a few ways to invest those funds, though. Your methods should depend on the type of investor you are and your risk tolerance. A higher risk tolerance may call for a more aggressive strategy, whereas lower risk requires caution.

Use HSA Funds for Other Qualifying Expenses

Your HSA funds will cover a range of qualified medical expenses, such as vision care, nursing services, dental care or hearing aids. But once you retire, other ways to use your funds become available to you. For example, you may decide to retire before age 65. In that, case you may have a time period where you lack medical coverage. That’s because you are off your workplace plan, but you are still too young for Medicare eligibility.

Usually, you can’t use HSAs for private health insurance premiums. However, you can use them if the coverage is an extended employer-sponsored plan through COBRA. Your funds may also cover premium costs if you receive unemployment compensation. This works at any age but may be particularly helpful for that early retirement gap.

Once Medicare kicks in, you can use it for certain expenses, such as Part B premiums and Part D prescription drug coverage. That also includes supplemental policy premiums (Medigap) but only for retirees over age 65 with an employer-sponsored health plan. Alternatively, HSA funds may partially cover the cost of a long-term, tax-qualified car insurance policy. Or, if you are 65 or older, your funds may go towards nonqualified medical costs. However, this last option forfeits some of your tax advantages.

Include Your HSA in Your Estate Plan

When you set up a traditional IRA, you name a beneficiary. The same applies to an HSA, wherein you choose someone to receive any unused funds following your death. Generally, deciding where your HSA assets go at that point falls into one of three categories:

  • Your spouse is the designated beneficiary: Upon transfer, the HSA gets treated as if it belongs to your spouse. That means it continues to receive the same tax benefits.
  • Your spouse is not the designated beneficiary: If the beneficiary is not your spouse, the HSA stops being an HSA. The account’s fair market value becomes taxable in the year you die to your beneficiary.
  • Your estate is the beneficiary: The HSA’s fair market value is part of your final income tax return.

Most people would choose their surviving spouse as the beneficiary. However, if you do not have that option, you may want to consider the most-tax efficient choice. One beneficiary might be in a lower tax bracket than the other, making it the stronger option. Naming your estate will likely lead to your HSA becoming a probate asset, though.

Because of complications like these, make sure you talk with a professional before you make your decision. An estate planner can help you with every step of the process, including drafting a will and minimizing taxes for your beneficiaries.

Bottom Line

Benefits of Using an HSA for Retirement

Healthcare is incredibly personal. Because of that, the best decision for one person may not be the same for another. HSAs come with triple tax advantages, a range of qualified expenses and the ability to invest. However, it requires an HDHP, which may not work for everyone. Or, it may not be available to you, either. There are multiple ways to build up your savings for retirement. If you are unsure whether an HSA is the right choice for you, consider talking with a financial professional.

Tips on Saving for Medical Expenses

  • Incorporating an HSA into your estate or retirement plan will require some careful thought. You could benefit from the guidance of a financial advisor when navigating that process, though. 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.
  • HSAs are for more than medical expenses – it’s possible to invest using them, too. But if you choose to put your money into any securities or mutual funds, make sure you consider the costs. You may run into restrictions or high fees. See what your HSA provider requires when it comes to investing with your account.

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