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SmartAsset: The IRS Just Boosted How Much You Can Contribute for Retirement

Healthcare ranks as one of the most pressing concerns for retirees, and with medical expenses rising every year, two out of three Americans worry about high healthcare costs in retirement. Models estimate that a retired couple at age 65 will need roughly $200,000 saved for healthcare alone–exceeding the average American’s total savings.

As part of its annual inflation adjustments, the IRS has recently released new contribution limits for health savings accounts, giving retirement savers more power to save for these increasing medical costs. HSAs are generally viewed as a way to save for health expenses, but they can also serve as powerful tools for retirement. Now you can save even more.

A financial advisor could help you plan for retirement and determine how an HSA could help with your financial goals. Speak to a qualified advisor today.

IRS Increases HSA Contribution Limits for 2023

High inflation and rising healthcare costs combine to create an ever-increasing burden on retirees. As part of its annual adjustments, the IRS has released its 2023 inflation-adjusted contribution limits for health savings accounts (HSAs). Starting next year, individuals with a high-deductible self-only health plan can contribute an extra $200 to their HSA. The new limit will increase from $3,650 to $3,850.

High-deductible health plans are health plans with an annual deductible that exceeds $1,500 for self-only coverage, or $3,000 for families. These are often paired with an HSA, which allows you to use pre-tax dollars to pay for qualified medical expenses.

How Retirement Savers Can Take Advantage

SmartAsset: The IRS Just Boosted How Much You Can Contribute for Retirement

Many people primarily consider HSAs as a way to save for health expenses, similar to using a flexible spending account (FSA) for lower-deductible plans. However, HSAs are often a powerful yet underutilized savings tool that extends tax benefits far into retirement.

HSA contributions are not subject to federal income taxes, so deducting your contributions from your salary can reduce your annual tax burden. You can continue to contribute until you enroll in Medicare.

Furthermore, HSA contributions earn interest free of taxes. Those funds can be invested, as well, and just like with an employer-sponsored retirement plan, your investments grow tax free. As such, unlike an FSA, the funds do not expire at the end of the year; the balance rolls over from year to year and the balance is always yours to spend, save or invest.

Lastly, at age 65, you have free access to your HSA funds for any purpose. There are no required minimum distributions and money taken out for eligible health expenses is not subject to federal income tax. If you do choose to withdraw funds in retirement, you will pay income taxes just like you would with other retirement plans.

Bottom Line

SmartAsset: The IRS Just Boosted How Much You Can Contribute for Retirement

The IRS recently released updated HSA contribution limits for 2023, adjusting annually for inflation. Starting next year, individuals can contribute up to $3,850 a year in tax-deferred dollars. HSAs are powerful retirement tools that are often underutilized, despite their tax advantages and growing concern for rising healthcare costs. You can qualify for an HSA so long as you are enrolled in a high-deductible health plan, and you may port your account if you change jobs because the account always belongs to you, not your employer. HSAs are best suited for retirement investment savings, but this may mean that you will pay out-of-pocket for medical expenses while contributing to one. If in doubt, an expert can help you determine if an HSA is a good choice for you.

Retirement Planning Tips

  • Not sure if choosing a high-deductible health plan with an HSA will help you in retirement? For a solid, long-term financial plan, consider speaking with a qualified financial advisor. 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.
  • Use SmartAsset’s free retirement calculator to get a good first estimate of how much money you’ll need to retire.

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