There are many financial tools that will be on your radar as your near retirement. It is likely you’ve already been paying into some of them, like 401(k)s or IRAs, for many years. But there is one account that is often overlooked as a retirement planning tool—the Health Savings Account (HSA). That’s right—believe it or not, an HSA is a significant savings vehicle that offers a triple tax benefit and can be leveraged as a highly valuable retirement saving tool.
HSAs: The Basics
HSAs were designed to provide individuals with High Deductible Health Plans (HDHPs) a tax-friendly way save for and cover health care costs and are generally offered as an add-on benefit. These plans allow you to transfer pre-tax dollars directly from your paycheck into your account to cover qualified medical expenses tax-free in the future. And unlike Flexible Spending Accounts (FSAs), which dictate you must use your funds within the calendar year or lose them, you can roll over your HSA funds year after year without penalty. They also are not permanently tethered to your employer so you can take your account with you from job to job and all the way into retirement.
The Triple Tax Benefit
The HSA is the only tool of its kind out there offering not one, not two, but three tax savings all in one account. Not only are contributions made with pre-tax dollars, but earnings are tax-deferred, and money withdrawn and used for qualified medical expenses is also untaxed! You will only pay taxes and penalties on cash taken out for non-qualified medical expenses; and after age 65, you no longer incur this penalty but the distribution is taxable.
From a tax planning perspective, the HSA is king. Even the most tax-friendly retirement accounts out there only offer a maximum of two tax savings. There are even some HSAs that pay interest on unused money left in your account or the ability to invest the money in financial products like exchange traded funds (ETFs) with these earnings also being tax-free!
You Control the Costs with an HSA
HSAs put you in the driver’s seat when it comes to saving, spending, and choosing care. You decide how much money to set aside (up to the maximum limit) and how that money is spent. Although the maximum HSA contributions in 2021 are $3,600 for single-filers and $7,200 for families, these numbers compounded over time can provide a sizeable savings when left untouched for years or decades on end.
You are also afforded the luxury of shopping around for quality care and choosing the physicians you want to see when you want to see them—an option many individuals who rely solely on certain Medicare plans may not have.
But why not just invest the money in an IRA?
In addition to the triple tax benefit, HSAs are more flexible than IRAs. They have no Required Minimum Distributions (RMD) and they also allow you to reimburse yourself for medical expenses incurred in previous years.
Here’s an example of how it works: Let’s say you contribute to your HSA for 25 years, but you don’t take out any reimbursements, you could feasibly have more than $450,000 saved. You could then reimburse yourself for past medical expenses tax and penalty-free. The remaining funds could be withdrawn any time after the age of 65 with income tax-withheld or used to pay for future medical expenses well into your 90s.
Is an HSA Right for You?
If, for the most part, you’re healthy and want to save for health care expenses down the road, an HSA is worth considering. HSAs become even more attractive as you near closer to retirement as they allow you to use the money you’ve saved to offset the rising costs of medical care as you age.
Keep in mind, to open an HSA, you must already have a high-deductible health plan (HDHP). Although HDHPs typically have low premiums, you can expect to pay more out of pocket for your medical expenses before the insurance company starts to pick up the bill. If you think you might need costly medical care in the near future and the high deductible would be difficult for you to cover, an HSA may not be your best option right now.
The strategies discussed in this article are based on current federal tax law. Most states follow federal tax law when it comes to HSAs, but yours may not. The taxation of these plans could change in the future at either the state or federal levels.
To learn more about these tax-friendly savings tools and evaluate if opening one could benefit your retirement strategy, schedule a conversation with the advisors at URS Advisory today. We look to help our clients retire comfortably, with a plan in place to not outlive their assets.
[i] https://www.investopedia.com/articles/personal-finance/091615/how-use-your-hsa-retirement.asp 12 April 2021
[iii] https://www.investopedia.com/articles/personal-finance/091615/how-use-your-hsa-retirement.asp 12 April 2021
Disclaimer: Advisory services are offered through URS Advisory LLC, a Registered Investment Advisor in the State of Florida. Insurance products and services are offered through URS Insurance, an affiliated company. URS Advisory LLC and URS Insurance are not affiliated with or endorsed by the Social Security Administration or any government agency. Investing involves risk including the potential for loss, and past performance is no indication of future results. Opinions expressed herein are solely those of URS Advisory. All written content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Material presented is believed to be from reliable sources; however, we make no representations as to its accuracy or completeness. All information and ideas should be discussed in detail with your financial adviser or qualified professional before making any financial decisions.