Having a sizable savings account is usually recognized as one of the most important steps toward financial fulfillment. It is also crucial to determine where to keep these savings, as there are several possibilities to consider. 401(k)s, IRAs, Roth IRAs, and other investment vehicles each have their own set of regulations, perks, and tax consequences. However, of them all, there is one type of account that may be the most helpful while also being the most underutilized: the health savings account (HSA).
What is a Health Savings Account (HSA)?
An HSA is a tax-advantaged way to save money to pay for qualified medical, dental, and vision expenses for people who are covered by a high-deductible health insurance plan and/or those who are not covered by Medicare.
HSAs, like 401(k)s and IRAs, have contribution limits that are set each year. While many high-income earners may be unable to contribute to an IRA Roth or take advantage of an IRA deduction, HSAs have no income restrictions. Furthermore, because HSAs are owned by the account holder, they are portable. Since its inception in January 2004, HSAs have grown in popularity among both individuals and businesses.
HSAs, in many cases, offer great flexibility in addition to tremendous tax savings. One reason is that there are no restrictions on when a health-care expense is spent and when it is repaid in an HSA. Instead of pulling money out of your HSA at the time of each medical bill, you can pay for the medical expense with cash and let your HSA grow. By retaining money in the more tax-advantaged HSA account, you can maximize the tax benefits. Additionally, HSAs allow account balances to roll over into future years making them perfect for long-term investment.
You can contribute up to the HSA Contribution Limits each year if you have a qualifying plan and you are not enrolled in Medicare. Individuals will be able to invest $3,650 and families will be able to invest $7,300 in 2022. If you’re 55 or older, you can also make a $1,000 HSA catch-up donation (just like an IRA). Also, you or your employer can make contributions to an HSA. Contributions that you make are deducted on your tax return similar to an IRA. Contributions made by your employer are not included in your income.
Ultimately, you can save the money in the account like a savings account, but you can also invest it.
Advantages of Using an HSA for Your Retirement Savings
Because of the tax advantages and flexibility that an HSA provides, it is an excellent long-term investment vehicle:
• You can make pre-tax contributions to the HSA;
• The money grows pre-tax inside the account;
• You can withdraw the money pre-tax at any time for qualified medical costs;
• You can use the money pre-tax to pay for Medicare premiums or long-term care insurance premiums;
• After age 65, the money in your HSA can be treated just like an IRA if you do not have qualifying medical expenses – you can withdraw money from your HSA account penalty-free, but you will still owe income tax on the amount withdrawn.
All of these benefits add up to make the HSA the ideal way to save for the future. Most (if not all) of your money will be pre-tax when you deposit it and could be pre-tax when you withdraw it. Medical expenditures can quickly mount up after you reach retirement age. If you use your HSA to pay for these expenses, you’ll be able to take advantage of these tax breaks! Your contributions, interest, and gains, as well as your withdrawals, are all pre-tax.
That’s tough to beat in terms of financial planning. It can also make costs like long-term care less daunting. An HSA is a terrific way to augment your IRA or 401(k). Because the 20% penalty vanishes when you turn 65, you won’t have to worry about whether an expense qualifies—you can spend your money any way you want.
HSAs are a great method to pay for medical expenses, but they can do so much more. If an HSA is suited for you, it could be a great addition to your retirement savings.
Retirees can be assured that the Czarnowski & Beer team can outline specific steps you should take to maximize their retirement benefits. Contact us at info@czarbeer.com to share your comments on this article and more.