A healthy way to save for retirement | Columns
Many of life’s expenses are unpredictable. But you know you will have to pay for two things: medical bills and retirement. You will likely need to take various steps to meet these costs, but one financial instrument that can help is a Health Savings Account (HSA).
If you are unfamiliar with an HSA, here are the basics:
• Eligibility – If you are enrolled in a qualified high-deductible health insurance plan (HDHP), you can usually contribute to an HSA. Although HSAs are usually offered by employers, you can still open one if your employer does not provide it or if you are self-employed, although you must have HDHP coverage. You also cannot be enrolled in any other health insurance plan, other than authorized ones, such as dental, vision, long-term care, and disability insurance, and you cannot be enrolled in Medicare. Also, you cannot be considered a dependent on another person’s tax return.
• Contribution Limits – In 2022, you can contribute up to $3,650 into an HSA if you have single coverage, or $7,300 for family coverage. And if you’re 55 or older, you can invest an additional $1,000 per year.
• Tax advantages – An HSA has a triple tax advantage: your contributions are made with pre-tax dollars, so they may reduce your taxable income for the year; your income grows tax-free; and your withdrawals are tax-free, provided the money is used for eligible medical expenses. (Withdrawals made before age 65 that are not used for eligible medical expenses are taxable and subject to a 20% penalty; once you reach age 65, the penalty no longer applies, although withdrawals are still taxable.)
In addition to its tax advantages, an HSA can help you in other ways. Perhaps more importantly, your HSA can be an additional financial resource for your retirement. This is because your HSA money can be carried over from year to year – you don’t have to “use it or lose it”. So the money not spent on annual medical expenses can continue to grow tax-deferred. Additionally, an HSA is “portable” – it travels with you when you leave a job.
Plus, unlike a 401(k) or traditional IRA, an HSA doesn’t require you to start making withdrawals once you turn 72 — you can leave your account intact for as long as you want. And while you may need to use your HSA funds to cover medical expenses in retirement — which can be substantial, even with Medicare — you can use what you don’t spend on medical expenses for your other needs without penalty, once you reach age 65. (As mentioned above, any unused HSA withdrawals for eligible medical expenses are taxable.)
Here’s another point to keep in mind: your HSA probably contains investment options, as well as a cash account. If you put all your funds in the cash account, as many people do, you risk missing out on the growth opportunities offered by investment options. On the other hand, of course, these investments generally involve more risk. One possible way to benefit from both parts of your HSA is to keep enough cash on hand to cover the maximum out of your health insurance and invest the rest.
As you can see, an HSA can help you in many ways. If you have access to it, consider taking advantage of it.