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How To Leverage Your Health Savings Account To Increase Your Options In Retirement

December 08, 2022

A health savings account (HSA) is a way to cover your annual healthcare costs with pre-tax dollars and still use the standard deduction on your tax return. However, there are other ways to use HSAs that will help build your retirement savings.

  • Money is contributed pre-tax
  • Your capital gains and earnings grow tax-free
  • Withdrawals for qualified medical expenses are tax-free
  • Money contributed via payroll deduction is not subject to FICA and FUTA taxes

These tax benefits make HSAs an incredible opportunity for retirement planning. To qualify for an HSA, you must have a high-deductible health insurance plan (HDHP) or an HSA-eligible policy. If you qualify, take advantage of an HSA.

Utilizing health savings accounts for retirement planning has become more popular in recent years. As you get older, you inevitably have higher healthcare costs. Once you’re retired, you either have private insurance or Medicare which still has its out-of-pocket costs. That’s where the HSA comes into play. Qualified medical expenses for HSAs can include Medicare Part B and Part D premiums and premiums for long-term care insurance.

One of the biggest mistakes made when planning for retirement is not accounting for medical expenses. According to Fidelity, the average 65-year-old couple that retired in 2022 will spend $315,000 on medical expenses in retirement. If there are no funds set aside specifically for medical expenses, paying the out-of-pocket funds will cut into your nest egg. Health savings accounts allow you to contribute funds throughout the year and have those funds roll over year after year, allowing you to build up a reserve specifically for healthcare costs.

Since your contributions are made with pre-tax dollars, you will benefit by having your taxable income lowered in the year of the contribution. Like other retirement accounts, there are contribution limits. In 2022, the contribution limit to an HSA for self-only coverage is $3,650 and $7,300 for a family plan. In 2023, the contribution moves up to $3,850 for a self-only coverage plan and $7,750 for a family plan. In both years, people 55 years old and up can take advantage of an additional $1,000 catch-up contribution.

Traditional IRAs and 401(k)s have required minimum distributions once you turn 72 years old. Health savings accounts do not have required minimum distributions. So, you only withdraw funds when they are needed.

To grow your balance over time, you can invest some of your funds within your HSA. It is recommended to leave a portion in cash so it can easily be used for any necessary and unexpected medical expenses, but the remainder can be invested for tax-free growth. Investing will allow your funds to compound and grow exponentially over time. These benefits make health savings accounts one of the most tax-efficient investment options for retirement planning.

One more nugget. Adult children under the age of 26, not claimed as a dependent on their parent’s return, and covered under their family’s HDHP can also contribute up to $7,300 (or $3,650) for 2022 or $7750 (or $3,850) for 2023.

Health savings accounts are one of the most tax-efficient ways to improve your retirement savings portfolio and create more options in retirement. Schedule a consultation with us today to continue the HSA discussion.