Updated: May 19
Health savings accounts are the most underutilized tool for retirement planning, knowing this little secret can help you stash away a lot more! How can a health savings account help you retire? How can you use an HSA for a long-term savings plan? Read on to find out.
A Health Savings Account is a great vehicle in retirement planning. While it is a tax-advantaged account with the main purpose of helping you pay for out-of-pocket medical expenses, it can help you retire as well.
You need to be covered under a high-deductible health plan to qualify for this type of account and according to research, it is highly underused, most Americans do not maximize their contributions, ($3,600 in 2021 for individuals and $7,200 for families).
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Here’s why an HSA makes a great retirement planning tool.
Contributions from your own funds are tax-deductible, your account balance grows tax-free and withdrawals for eligible medical expenses are also tax-free, unlike most other retirement accounts which don’t allow all those tax benefits in a single account.
If the account is used as intended, it will already give you an edge in retirement, as withdrawals from a 401k or an IRA are taxable, regardless of the intended use. Non-qualified withdrawals from an HSA are subject to a 20% penalty until you’re 65 and qualify for medicare. At that point your HSA can be used like any other retirement account, while you’ve potentially enjoyed decades of tax-free growth and tax-deductible contributions.
Using an HSA for a long-term savings plan would mean maxing out your annual contributions and avoiding withdrawals, thus treating it like any other retirement account as that’s essentially what it becomes past age 65.
Invest it well to ensure you compound it for as long as possible and maximize the growth. You will be glad whether you need it for medical expenses or for retirement income. As we age, our care costs will likely increase, an HSA can be used to fund long-term care, a big expense not covered by medicare that many Gen Xers and even Baby Boomers are for their parents. If you’re healthy for the rest of your life and don’t end up using your HSA funds, the account can be passed on just like a retirement account.
Tax planning is an essential tool to ensure a comfortable retirement and maximize your wealth creation, if you qualify, using an HSA may provide significant income during retirement, with added flexibility beyond other retirement savings accounts.