You’re probably quite familiar with 401(k)s and individual retirement accounts (IRAs), but have you ever considered a health savings account (HSA) for your retirement years?
Financial advisor and author Suze Orman says an HSA is “one of the best retirement accounts out there.” But you may be wondering what exactly a health savings account has to do with retirement.
“Can you imagine putting money in and getting a tax write-off for it and using it tax-free? There is not one other retirement account that offers that benefit,” Orman said during an episode of her podcast, Women & Money.
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HSA contributions reduce your taxable income, and your money grows tax-free while in the account. When you withdraw money for a qualifying medical expense, it’s still tax-free — and, as Orman pointed out, “it covers almost… everything except certain dental services and a few other things.”
That being said, a health savings account is meant for health-related expenses. So, it shouldn’t replace your 401(k), IRA, or other dedicated retirement accounts. Rather, “it works in conjunction with those retirement accounts,” Orman said.
How does an HSA work?
A health savings account, or HSA, is a tax-advantaged account for individuals with high-deductible health plans (HDHPs). Funds can be used to pay for qualifying medical expenses, such as deductibles, co-payments and co-insurance, as well as some dental, drug and vision expenses, according to HealthCare.gov.
So long as you use your funds to pay for one of these qualifying medical expenses, you won’t pay tax upon withdrawal.
Individual HSAs are available from banks, credit unions and insurance companies. Some employers will provide an annual tax-free contribution to help fund your HSA — indeed, three-quarters of employers make HSA contributions and 60% offer investment options for HSAs, according to the 2022 HSA Survey from the Plan Sponsor Council of America. But keep in mind, an employer contribution goes toward your maximum contribution for the year.
The annual maximum contribution for an HSA (with pre-tax dollars) in 2024 is $4,150 for an individual and $8,300 for a family. If you’re 55 or older, you can take advantage of an extra $1,000 catch-up contribution.
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Other benefits of an HSA
Aside from the tax advantages, there are other reasons to consider a health savings account.
Even with Medicare, your healthcare costs in retirement could be hefty.
A 65-year-old “can expect to spend an average of $157,500 in healthcare and medical expenses throughout retirement,” stated Fidelity Investment’s annual Retiree Health Care Cost Estimate for 2023. An HSA can help with that — tax-free.
However, say you don’t have any major medical expenses in a given year. Unlike 401(k)s and traditional IRAs, HSAs aren’t subject to required minimum distributions (RMDs), which require you to start minimum withdrawals at age 73. So you can continue to let your money compound, penalty-free, until you actually need it.
If you’re 65+ and want to use that money for a non-qualifying medical expense, you won’t be subject to any penalties, though you will have to pay income tax. Yet, as Orman pointed out, this isn’t really a big deal.
“You get to take the money out without any penalty whatsoever,” she explained. “However, now you will pay ordinary income tax on it, but that’s not such a big deal because that’s almost exactly like a traditional IRA or traditional 401(k).”
However, if you take the money out for a non-qualifying medical expense prior to turning 65, there’s a steep 20% penalty, plus taxes, on withdrawals. Also, once you’re enrolled in Medicare, you can no longer contribute to an HSA.
A health savings plan may not be a replacement for other retirement accounts, but it could be part of the mix. At the very least, it might be worth having a conversation with your financial advisor to find out if contributing to an HSA is right for you.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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