Why can a health savings account be a powerful investment in retirement planning?

Planning for your retirement is essential since you will leave the workforce and are unlikely to have any regular source of income. And the rising cost of healthcare has become a major concern of retirees.

According to Fidelity’s 20th annual retiree healthcare cost estimate, a 65-year-old couple in 2021 may need about $300,000 savings to cover healthcare expenses in retirement.

That’s why you need to save for medical expenses during your golden years. By doing so, you can brace yourself from skyrocketing healthcare expenses.

When we talk about retirement savings, most people think about 401k or 403b or IRAs. But these are not the only ways to create your nest egg.

You can opt for the Health Savings Account (HSA) to save for significant retirement expenses along with added tax benefits.

What is an HSA?

An HSA is like a tax-free savings account, but you can use the money only for qualified healthcare expenses, reducing your overall health care costs.

Are you eligible for an HSA?

According to the Internal Revenue Service (IRS), you are eligible for an HSA if:

You are covered under a high deductible health plan (HDHP) on the first day of the month.

According to HealthCare.gov, the minimum deductible for the plan year 2021 is $1,400 for an individual and $2,800 for a family. For the plan year 2022, the minimum deductible for an HDHP is $1,400 for an individual and $2,800 for a family.

  • You have no other health coverage except what is permitted under other health coverage.
  • You aren’t enrolled in Medicare.
  • You can’t be claimed as a dependent on someone else’s 2020 tax return.

But how can an HSA help you in retirement? Here are a few points that will help you understand how an HSA can be a powerful investment in your retirement planning.

1. HSAs have triple tax benefits

An HSA allows you to contribute money before taxes through payroll deductions, grow your savings tax-free, and withdraw money tax-free for eligible medical costs.

2. Boost your IRA retirement savings

If you withdraw funds from your HSA, you will have to pay a 20% tax penalty along with regular income tax on the funds you are withdrawing.

However, after turning 65, if you withdraw funds from the HSA for non-medical expenses, you won’t have to pay any penalties. You only have to pay the income tax due on that amount.

So, it’s pretty similar to an IRA withdrawal after turning 59 ½. If you have an IRA retirement plan, you can boost your nest egg by opting for an HSA. Also, you won’t have to wait till the age of 72 for taking minimum distributions like a traditional IRA.

3. An HSA can be a part of your estate planning

Estate planning is important to safeguard your assets for your family after your demise. And an HSA can play a major role in that. If your spouse is a designated beneficiary in your HSA, it will become your spouse’s HSA with the same benefits.

However, if your spouse is not a designated beneficiary of your HSA, the fair market value of the HSA becomes taxable to the beneficiary in the year of your death.

4. Offers flexibility

There is no “use it or lose it” rule with an HSA. The money in your HSA follows you throughout your career, whether you’re furloughed, switch jobs, or retire. You can carry forward the unused balance, if any, from year to year. Once you turn 65, you can use the funds for anything by paying ordinary income tax.

5. Investment of HSA funds

You can use your HSA funds to grow your savings over time. Contact your HSA provider to find out any specific information about investing funds.

You can put your pre-tax money into the stock market and earn a return on your investment. The best part is, you won’t have to pay taxes on the money you make through investing.

So, you can keep your investment returns without giving a share to Uncle Sam.

How much can you contribute to an HSA?

According to the IRS, the amount of money you may put into your HSA varies depending on the type of plan you have and your age.

2021 HSA Contribution Limits:

$3,600 for self-only coverage

$7,200 for family coverage

If you are over 50, you can contribute an additional $1,000 over the annual limit.

2022 HSA Contribution Limits:

$3,650 for self-only coverage

$7,300 for family coverage

If you are over 50, you can contribute an additional $1,000 over the annual limit.

The bottom line is an HSA is a tax-efficient way to save for your retirement and future healthcare needs. So, try to contribute the maximum amount and make the most of it. Also, make sure not to withdraw funds from your HSA unless it’s indispensable.

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Lyle Solomon
Lyle David Solomon is a licensed attorney in California. He has been affiliated with law firms in California, Nevada, and Arizona since 1991. As the principal attorney of Oak View Law Group, he gives advice and writes articles to help people solve their debt problems.

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