How To Use HSA For Retirement

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 7 minute read

To put money aside for retirement is a challenge, but it’s a necessary aspect of everyone’s financial plan. Individual retirement accounts (IRAs) and 401(k) plans are two tax-advantaged vehicles that can simplify retirement savings.

The health savings account (HSA) is a tax-advantaged account, but its primary purpose is not to aid retirement savings. But its special advantages make it a formidable tax shelter. One of the finest methods to save for retirement is with the help of a health savings account (HSA), if you are eligible for one.

How Do Health Savings Accounts Work?

In order to maximize your HSA contributions toward future medical expenses and retirement, you must have a firm grasp of how they function. If you break the rules, you will have to pay the consequences.

Insurance Prerequisites

At the outset, not everyone is eligible to start a health savings account. Only those with high deductible health plans can purchase them.

The deductible is the out-of-pocket expense that must be met before an insurance policy begins paying benefits. To illustrate, if your health insurance plan has a $2,000 deductible, you will be responsible for the first $2,000 of your medical bills before the insurance company begins to contribute. Monthly premiums for an HDHP tend to be less than those of other plans.

To be considered a high-deductible health plan (HDHP), an insurance policy must fulfill the following criteria:

  • Health insurance premiums are higher than average ($1,400 for individuals and $2,800 for families in 2022).
  • The maximum annual deductible and out-of-pocket expenses for covered expenses are capped at $7,050 for individuals and $14,100 for families in 2022.
  • Preventative care may be offered at no cost to the patient or at a reduced cost, but this is not a requirement.

Additional Qualifications

A health insurance plan must meet these specific conditions in order to be eligible for an HSA:

  • You have coverage under an HDHP.
  • You have no additional health insurance coverage, with the exception of the following:
    • Liabilities incurred under workers’ compensation laws, tort liabilities, or liabilities related to ownership or use of property.
    • A specific disease or illness.
    • A fixed amount per day (or other period) of hospitalization.
    • Coverage for accidents, disability, dental care, vision care, and long-term care.
  • You do not have Medicare coverage.
    No one claims you as a dependent on their tax return.

If you match the criteria, you are eligible to open an HSA.

Contribution Caps

It’s not possible to put as much money as you want into a health savings account because of the IRS’s limits on tax-free savings accounts. The annual contribution cap prohibits individuals from getting a disproportionately large tax benefit. The maximum outlay for an individual plan in 2022 is $3,650, while the maximum for a family plan is $7,300.

To further sweeten the deal, several companies with HDHP plans also contribute to their workers’ HSAs. Don’t forget to factor in your employer’s contribution when calculating whether or not you will go over the contribution cap.

Tax Benefits

For most people, the tax benefits associated with HSAs are enough to justify their usage as a savings vehicle. All HSA contributions are made before taxes are taken out, much like standard IRAs and 401(k)s. The money you put into the account is tax deductible.

By contributing $5,000 to your HSA, you may reduce your taxed income from $50,000 to $45,000. A $1,100 reduction in your tax liability means that you will only have to come up with $3,900 to make a $5,000 gift.

Withdrawals from a regular IRA or 401(k) are subject to income tax. High-deductible health plans are unique. Withdrawals from a health savings account are not subject to federal income tax if used to cover medically necessary costs. As a result, they get double the tax benefits.

After reaching the age of 65, you are allowed to start using your HSA funds for things other than healthcare. If you do, similar to a retirement account, you will owe income tax on the amount withdrawn but will avoid penalties.

Penalties and Qualified Withdrawals

An HSA is a special savings account that can only be used to pay for certain medical costs. Qualified costs are detailed in IRS Publication 502, although they include the usual suspects.

  • Fees for ambulances
  • Birth control pills
  • MRIs and X-rays are examples of body scanning.
  • Lenses for contact lenses
  • Dental therapy
  • Addiction treatment
  • Eye examinations
  • Aids to hearing
  • Services provided by hospitals
  • Physical examinations
  • Prescriptions
  • Surgery

Withdrawals made from HSAs for purposes other than medical ones incur a 20% penalty if the account holder is under the age of 65. If you’re under 65 and withdraw the money for personal reasons, you’ll have to pay income tax on the entire amount.

However, after you reach age 65, you are free to use your HSA funds for anything other than medical expenditures without incurring a penalty. You will still be responsible for paying income tax on the money you take.

For tax purposes, you typically aren’t required to provide proof that you’ve used your Health Savings Account funds for eligible medical expenditures; nonetheless, you should always save your receipts to demonstrate the exact amount of qualified medical expenses incurred in relation to your HSA withdrawals. In case of an audit, you can reference the receipts for proof of expenditures.

How to Use an HSA for Retirement Investing

Health savings accounts (HSAs) are popular among Americans because of their flexibility and potential impact on retirement savings. Here are some things to keep in mind if you want to use your HSA as a retirement fund.

  1. Contribute as Much as You Are Able

Putting as much money as you can into your HSA is the first step toward using it as a retirement savings vehicle.

To get the most out of your 401(k), you should put in as much money as possible up to the limit that your company will match. If your company has a matching contribution program, take advantage of it to increase your earnings.

Your next step should be to start contributing to your HSA and continue doing so until you reach the annual contribution limit.

  1. Invest Your Savings

It’s easy to assume that your HSA is just a savings account because of its name. Although interest is earned on savings accounts, over time they often result in a decrease in purchasing power due to inflation.

Your Health Savings Account (HSA) provider will determine whether or not you may invest your HSA in the stock market. This implies that, just as with a 401(k) or a taxable brokerage account, you may utilize the funds in your HSA to amass a variety of investments. A fantastic strategy to help your HSA balance increase is to create a portfolio of low-cost index funds.

If you want to use the HSA for non-taxed medical costs as well, you need to set aside some cash.

  1. Wait till you’re 65 years old.

There is nothing left to do except wait once an HSA has been established, donations have been made, and funds have been invested. If you reach the age of 65, you can access the funds in the same way you would from a traditional 401(k) or individual retirement account (IRA). After that point, you are under no obligation to spend the money on healthcare.

One potential drawback is that IRAs and 401(k)s offer more withdrawal options than traditional pension plans. At age 59 12, you are no longer subject to early withdrawal penalties from these funds.

  1. Keep Your Receipts

Make careful to keep all medical receipts even if you don’t intend to utilize your HSA money for that purpose. You should keep all of your medical receipts since there is no statute of limitations on using funds from your HSA to pay for eligible medical expenses.

Imagine you go for a run and end up injuring your leg, forcing you to undergo surgery. The $5,000 hospital bill will arrive when you’ve fully recovered.

You may either pay the charge immediately by withdrawing funds from your HSA or you can pay it later using cash, allowing your HSA funds to continue growing tax-free. You opt to cover the cost yourself.

Since HSA reimbursements are not subject to a time limit, you can withdraw $5,000 from your HSA whenever you choose without paying taxes or penalties. Withdrawal can be made today, tomorrow, next year, in ten years, or upon retirement.

This is preferable to waiting until age 65, when withdrawals for nonmedical purposes still pay income taxes. You can withdraw the full amount of your eligible medical costs from your HSA tax-free if you pay for them out of pocket but save your receipts.

Since contributions to and eligible withdrawals from HSAs are not taxed, they are more potent than those from traditional retirement accounts.

There is a vast list of different types of medical costs that are covered. If you’ve accumulated enough eligible expenditures over time, you can take money out of your IRA without having to pay taxes.

Bottom Line

To qualify for a Health Savings Account (HSA), you must have a high-deductible health insurance plan. To make the most of these accounts as retirement savings vehicles, you should also have alternative ways to pay for out-of-pocket medical costs.

401(k)s and IRAs will be the primary vehicles for retirement savings for the vast majority of working adults. When investing for long-term purposes other than retirement, a taxable brokerage account might be useful.

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