If you have a Health Savings Account (HSA) option, the benefits are worth the investment. The tax benefits of an HSA magnify the advantage of investing in, say, stock funds or diversified mutual funds. First, your contribution is tax-deductible. Second, once inside your HSA, your money grows tax-free. Third, when used for eligible healthcare costs, withdrawals are tax-free. Finally, you can keep the account even in retirement to pay for medical bills.
The average couple retiring today needs a whopping $280,000 to cover the cost of health care throughout their retirement. You need to plan for those future health costs. The truth is your HSA is more than just a regular old savings account. Your HSA investment options can help you save for doctor visits and prescriptions and add some extra tax-free cash to your retirement dreams.
An HSA is a tax-advantaged savings account paired with a high-deductible health plan (HDHP) that can help you pay for medical expenses—both now and in the future. Your HSA usually starts as a cash account, which earns interest like a savings account. But once you reach a certain balance, you can change your HSA into an investment account, which functions like an IRA.
- Lower monthly premiums help you save money. Having an HSA-qualified, high-deductible health plan means you’ll pay less in monthly premiums than you would with a traditional health plan. The downside of a higher deductible is that you’ll need to pay more before your insurance kicks in.
- HSAs come with some fantastic tax benefits. With an HSA, you can take advantage of not one, not two, but three incredible tax benefits that can help you save for medical expenses both now and in the future:
- You’re not taxed when you put money into your HSA.
- The money in your HSA grows tax-free.
- You’re not taxed when you take money out to pay for medical expenses.
BONUS: Your HSA can lower your tax bill by reducing your taxable income. For example, if you put $2,000 into an HSA in a year, you lower your taxable income by $2,000!
- You own your HSA, and it rolls over each year. The great thing about an HSA is that it’s entirely yours. Those funds are yours to use for qualified expenses. Your HSA balance rolls over year-to-year, so you have access to all the money in the account.
You can invest your HSA funds, so they grow over the long term. When you turn 65, that HSA will act like a traditional IRA—you can take the money out for whatever you like, but you’ll have to pay taxes on it. On the flip side, at 65, you become eligible for Medicare coverage. Once you enroll in Medicare, you can’t contribute to your HSA anymore, but you can still use the money in your HSA tax-free for medical expenses. That makes using an HSA a perfect option for covering health costs in your retirement years.
It’s worth noting that having an HSA also means there’s no minimum distribution so you can keep the money in your HSA as long as you like.
According to Dave Ramsey, if your 401(k) and Roth IRA are the star players of your retirement plan, then the HSA is like the closer—a key teammate there to seal the deal and bring your team to victory. Preparing for medical and other expenses during retirement takes insight and expertise, and we’re here to help. Call us today and let’s see if we can optimize your HSA to help when you need it most.
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This document is for educational purposes only and should not be construed as legal or tax advice. One should consult a legal or tax professional regarding their own personal situation. Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products offered by an insurance company. They do not refer in any way to securities or investment advisory products Insurance policy applications are vetted through an underwriting process set forth by the issuing insurance company. Some applications may not be accepted based upon adverse underwriting results. Death benefit payouts are based upon the claims paying ability of the issuing insurance company. The firm providing this document is not affiliated with the Social Security Administration or any other government entity.
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[1] https://www.daveramsey.com/blog/hsa-investment