Many expenses in life are unpredictable. But there are two things you know you’ll have to pay for: medical bills and retirement. You’ll probably need to take a variety of steps to meet these costs, but one financial instrument that can help is a health savings account (HSA).
If you’re not familiar with an HSA, here are the basics:
- Eligibility – If you are enrolled in a qualified high-deductible health plan (HDHP), you can generally contribute to an HSA. While HSAs are typically offered through employers, you can still open one if your employer doesn’t provide it, or if you’re self-employed, although you must have HDHP coverage. You also can’t be enrolled in another health insurance plan, other than those permitted, such as dental, vision, long-term care and disability insurance, and you can’t be enrolled in Medicare. Also, you can’t be claimed as a dependent on another person’s tax return.
- Contribution limits – In 2022, you can put in up to $3,650 to an HSA if you have single coverage or $7,300 for family coverage. And if you’re 55 or older, you can put in an extra $1,000 per year.
- Tax benefits – An HSA has triple tax advantages: Your contributions are made with pre-tax dollars, so they can reduce your taxable income for the year; your earnings grow tax-free; and your withdrawals are tax-free, provided the money is used for qualified medical expenses. (Withdrawals taken before age 65 that aren’t used for qualified medical expenses are taxable and subject to a 20% penalty; once you reach 65, the penalty no longer applies, although withdrawals are still taxable.)
In addition to its providing tax benefits, an HSA can help you in other ways. Perhaps most significantly, your HSA can be
an additional financial resource for your retirement. That’s because the money in your HSA can be carried over from year to year – you aren’t obligated to “use it or lose it.” So, the money not spent on annual medical expenses can continue to grow tax-deferred. Plus, an HSA is “portable” – it moves with you when you leave a job.
Furthermore, unlike a 401(k) or a traditional IRA, an HSA does not require you to begin taking withdrawals once you reach 72 – you can leave your account untouched for essentially as long as you’d like. And while you may need to use your HSA funds to meet your medical expenses in retirement – which can be considerable, even with Medicare – you can use what you don’t spend on medical costs for your other needs without penalty, once you reach age 65. (As mentioned above, any HSA withdrawals not used for qualified medical costs are taxable.)
Here’s one other point to keep in mind: Your HSA likely contains investment options, along with a cash account. If you put all your funds in the cash account, as many people do, you might be depriving yourself of the growth opportunities provided by the investment options. On the other hand, of course, these investments generally carry more risk. One possible way to benefit from both parts of your HSA is to keep enough cash to cover your health insurance’s out-of-pocket maximum and invest the rest.
As you can see, an HSA can help you in numerous ways. If you have access to one, consider taking advantage of it.