H is for HSA’s and How they Can Benefit You in Retirement
During the last decade, health savings accounts (HSA’s) have grown in record numbers, yet most account holders are not aware of their full potential. HSA’s come with a triple tax advantage and long-term investment potential. HSA’s provide a deduction for contributions, tax-free growth and tax-free withdrawals for qualified health care. All of this may be common knowledge. But, many account holders are unaware of their options to invest or how to go about it, leaving much of this money in cash and losing the potential for growth.
Navigating investment options can be confusing so discuss your options with your financial advisor and let them help you estimate your time horizon and health considerations. Due to their lack of savings, numerous account holders are forced to use HSAs as a short-term vehicle for health care expenses. However, if you can afford to invest long-term, an HSA may be more valuable than you know.
Consider the following about HSA’s:
It has a higher annual contribution limit for family coverage $6,900 compared to $5,500 allowed for traditional and Roth IRAs. All funds must be used for qualified medical expenses until age 65. Or you will owe income tax and incur a 20 percent penalty on the withdrawal.
HSA account owners can make catch-up contributions at age 55, much like a 401K or IRA.
After age 65, the HSA funds can be used for a non-medical expense without a penalty, but like traditional IRA’s you must pay taxes. At 65 you can no longer make a contribution to this account.
HSA’s are the only triple tax-advantaged vehicle available for retirement purposes. Funds go in pretax and grow tax-deferred. If used for medical expenses are withdrawn tax-free. If you take funds from a traditional IRA or 401K to pay for medical expenses, you will be taxed.
HSA funds are not subject to required minimum distributions (RMDs). Which may be a tax advantage, helping you avoid a higher tax bracket and higher Medicare cost during retirement.
HSA funds can help pay for Medicare premiums such as Parts B and D, on a tax-qualified basis. Considering the number of years, you will most likely pay this cost. Using a tax-free HSA can save a considerable amount of money compared to paying with taxed funds.
HSA funds can be reimbursed for medical expenses at any time. But you must document your costs. By paying out of pocket for medical expenses and leaving the money in the HAS to continue to grow tax-deferred.
Incorporating an HSA into your retirement plan can give you another vehicle to help you achieve your future financial goals. Make sure you do your homework and shop for the right HSA for you. Each offers its own administrator’s policies, fees, and investment options.