Is an HSA Your Best Retirement Account Option?

April 6, 2022
  • facebook
  • linkedin
  • twitter
  • google plus

If there is one sure thing about retirement, it’s that a significant amount of your money will likely go toward healthcare expenses. We all get older and that usually means more medical costs. Unless your pension plan includes healthcare coverage, these expenses will be coming out of your pocket after you retire. You will have to pay for medical insurance, which gets more expensive with age and pre-existing conditions. Then, you have deductibles and other unexpected medical bills that may arise.

Personal finance experts estimate that an average retired couple at the age of 65 will require at least $300,000 to cover healthcare expenses in their retirement years. You may need even more!

Start Saving Now

The time to save for these medical expenses is before you reach the age of 65. Health care planning should be a significant part of your overall retirement plan and long-term financial strategy. The best way to do this may be to open a Health Savings Account (HSA). You can start saving now just like your IRA or 401(k) with a tax-advantaged account. You could have a healthy HSA balance by the time you are ready to retire.

Not everyone is eligible for an HSA. You can establish one if you are self-employed or your employer doesn’t offer health benefits. Some employers may offer an HSA option as part of their fringe benefits package. If so, you will definitely want to consider this as one of your retirement savings solutions.

The Benefits of an HSA

An HSA is basically an IRA for healthcare. It must be paired with a high-deductible health insurance plan with a minimum annual deductible of $1,400 for single coverage ($2,800 for family coverage). The maximum annual deductible must be no more than $7,050 for self-only coverage ($14,100 for family).

An HSA can provide you with three key tax benefits:

  1. You or your employer can deduct contributions, up to the annual limits.
  2. The money in the account grows tax-free (and can be invested in many ways).
  3. Distributions are tax-free if used for medical expenses.

No other tax-advantaged retirement savings account offers all three of these benefits.

Financial Flexibility

An HSA also offers you excellent flexibility for how you utilize your account funds. You may take distributions from your HSA at any time without penalty. Unlike with a traditional IRA or 401(k), you do not have to take annual required minimum distributions from the account after you turn 72.

In fact, you never have to take any distributions from your Health Savings Account if you don’t need them. You can name your spouse as the designated beneficiary of your HSA. The tax code treats it as your spouse’s HSA when you die (no transfer/inheritance taxes are due).

HSA funds can be pulled and utilized for other non-medical expenses. Just understand that the tax-free distributions are only for qualified medical expenses. You may be subject to fees and taxes on any HSA distributions not used for health care. Having said that, the taxes will be similar to what you would be paying on your IRA/401(k) distributions. The HSA gives you flexibility while ensuring your medical expenses are covered tax-free.

If you have any questions about HSAs and other retirement planning options, contact Illumination Wealth today.