How Can a Health Savings Account Help You Save for Retirement?
Your health care costs are likely to go up when you retire. Even if you are lucky enough to live a long time and stay healthy, you will eventually get to an age where it costs more to keep your health up. Even before then, it's likely that you'll have to pay for Medicare when you retire. This is just one more reason to start saving for retirement as soon as you can. Health Savings Accounts are an often-overlooked way for people to save money for future medical costs (HSAs). HSAs let people and families put tax-free money into accounts that can only be used for qualified medical expenses when the account holder gets older.
What are HSAs?
A Health Savings Account (HSA) is a special savings account that lets you save money for medical costs without having to pay taxes on it. Unlike Flexible Spending Accounts (FSAs), which must be used within a calendar year, Health Savings Accounts (HSAs) can be invested for use in future years and do not expire if they are not used. They're also different from Health Reimbursement Arrangements (HRAs), which are accounts set up by employers and must be used to pay back employees' health care costs. HSAs can be set up for just one person or for the whole family. If they stay in the HSA or are used for qualified medical expenses, they are not subject to penalties or federal income tax. Also, when you retire, they basically turn into an IRA (subject to federal tax), so they're a great way to save money overall.
Here are some other major differences:
The Pros of HSAs: Contributions are tax-deductible: The money you put into an HSA is tax-deductible, which means that it lowers the amount of taxable income you have to report on your taxes. For example, if you make $50,000 and put the most you can into an HSA in 2022, which is $3,650, your taxable income drops to $46,350, which is a difference of $3,650. Depending on your tax bracket, this will save you anywhere from 10% to 37% on that $3,650, or between $365 and $1350 in taxes.
Tax-free withdrawals: When it's time to pay for medical bills, you can take money out of your HSA account without being taxed. This includes bills for family members if you have a family plan. HSAs are the only accounts that give you a tax break when you put money in and still let you take money out tax-free (for qualified expenses).
Penalty-free withdrawals for non-medical expenses in retirement: If you use some or all of your HSA balance after age 65 as part of your plan for retirement (by taking it out as cash or using debit cards that are directly linked to this account), you won't have to pay a federal income tax penalty on those withdrawals. If you don't use the money for medical costs, you will have to pay federal taxes on the withdrawals from your HSA when you retire.
How to Set Up An Account
You can open a health savings account in more than one way. Many banks, credit unions, and broker-dealers offer HSAs. They are often paired with a checking account or other financial services like investing products. Some health insurance companies also offer HSAs to their customers, which may be easier than using a traditional bank account if that's your main source of health coverage. If your job provides health insurance, ask if HSAs are part of the benefits. Some companies do offer them. (Vincere Wealth Management can walk you through how to set one up.)
How to Make Contributions
At any time during the year, you can put money into your HSA. In fact, you can make payments even if you are already on Medicare. Also, if your deductible is high enough, you may still be able to get an HSA even if you don't have an HDHP. For a single person, your deductible must be at least $1,400, and for a family, it must be at least $2,800. The deductibles, copayments, and coinsurance can't add up to more than $7,050 a year for an individual or $14,100 a year for a family (for 2022).
In 2022, the most you can put into a health savings account (HSA) as an individual or a family is $3,650 and $7,300, respectively. In 2023, a single person can only put $3,850 into an HSA, while a family can put $7,750. You can make a $1,000 "catch-up" contribution if you are 55 or older during the tax year. If your spouse is 55 or older, they could also make a catch-up contribution, but they would need to have their own HSA.
Using Tax Advantages
Learn about the three tax advantages and how HSAs work:
If you have a health plan at work or on the private market that can be used with an HSA, you can put money into an HSA. Most people use HSAs to save money for current medical costs that aren't covered by their health insurance. But if you can pay for these costs out of your own pocket, an HSA is a great way to save for retirement because it is tax-free in three ways.
Many people put money into their HSAs through payroll deductions before taxes are taken out. This means that their contributions are also not subject to FICA taxes. As long as you are enrolled in a qualifying health plan, you can set up an HSA outside of work and put money into it with money you earned after taxes. You can then deduct this money from your personal tax return. These contributions can grow tax-free and can be taken out tax-free to pay for eligible medical costs now and in the future, including costs that come up during retirement. If you are no longer covered by a qualified plan, you can't make any more contributions, but you can keep the account and your contributions will continue to grow tax-free.
It gets better: Unlike most flexible spending accounts (FSAs), funds in an HSA can stay in the account from one year to the next. Your HSA can earn interest or earnings, and you can even take it with you if you change jobs or retire.
HSAs are a great way to save money for retirement health care costs:
You can also use these accounts to pay for things that aren't medical. This means you can earn interest on your money without having to worry about taxes. When you use your HSA money to pay medical bills or other costs related to health care, you won't have to pay taxes on the money you take out.
HSAs are great for saving money for medical costs in the future, but they also have some great benefits that make it easier to manage money now. HSAs let people who don't get insurance through their jobs or who have cheap insurance save more than they would have otherwise. Many employees don't even get much in the way of eye coverage from their employers these days. You can always use your HSA to pay for qualified medical expenses, like eye and dental care, hearing aids, and nursing services. You can use the money in other ways after you retire:
1. Help the transition to Medicare
If you retired before you turned 65, you might still need health insurance until you are eligible for Medicare at 65. In general, HSAs can't be used to pay for private health insurance premiums, but there are two exceptions: paying for health care coverage bought through an employer-sponsored plan under COBRA and paying premiums while getting unemployment benefits. This is true at any age, but it could be helpful if you lose your job or decide to stop working before you turn 65.
2. Cover Medicare premiums
Some Medicare costs, like the premiums for Part B and Part D prescription drug coverage, can be paid for with your HSA. But you can't use it to pay for a Medigap policy's premiums. If you are over 65 and your employer pays for your health insurance, you can also use an HSA to pay for your share of those costs.
3. Costs for long-term care
Your HSA can help pay for a "tax-qualified" long-term care insurance policy. You can do this at any age, but you'll be able to use more as you get older.
4. Pay for other expenses
When you turn 65, you can use your HSA to pay for anything that isn't a qualified medical expense. You could, for instance, use it to buy a boat. But you won't be able to take full advantage of the tax savings because you'll have to pay state and federal taxes on those distributions because they aren't qualified medical expenses.
Let HSAs play a role in your estate plan!
If your medical costs are much lower than average (or if you don't live that long), you might have money in your HSA that you can give to your heirs. The rules are complicated, so it's best to talk to an estate planning attorney or financial advisor.
There are usually three things to think about when deciding what happens to your HSA assets after you die:
1. The spouse is named as the beneficiary.
If you name your spouse as the beneficiary of your HSA, it will become your spouse's HSA after you die, and it will still be tax-free in three ways.
2. The spouse is not the person who will get the money.
If your spouse isn't the beneficiary of your HSA, the account stops being an HSA, and the beneficiary has to pay taxes on the fair market value of the HSA in the year you die.
3. Your estate will get the money.
On your final tax return, you will write down the fair market value of your HSA. Many people would choose to name the surviving spouse as the beneficiary over the other two options. But if you don't have a surviving spouse, you may want to think about how to pay the least amount of taxes. In that case, you might want to name your estate or the person who will get the money as the beneficiary, depending on who will pay the least amount of taxes. Work with people who know about taxes and estate planning to figure out which option is best for you.
Tip: If you name your estate as the beneficiary of your HSA, it will likely become a probate asset and will still need to fit into your overall estate plan.
Most people must take required minimum distributions from traditional IRAs and 401(k)s when they turn 72 and pay taxes on those distributions. There is no minimum amount that has to come out of an HSA.
An HSA can help you save money on taxes in three ways, so if you want to protect your retirement now and in the future, you should think about getting one.
In the end, health savings accounts are a great way to save for retirement. You can use them for any current or future health care costs, and you will never have to pay taxes on that money. They also help you save money on taxes when you put money into or take money out of your account. So, if you want to save more money or if your employer offers this as part of their benefits package, you should definitely take advantage of it!