Health savings accounts can save you more for retirement than you know
When it comes to saving (and investing) for health care expenses in retirement, there might be no better option than a health savings account or HSA.
Why this? Essentially, these are the tax benefits:
- First, contributions are pre-tax if you contribute through payroll deduction or tax deductible if you contribute money after-tax.
- Second, the money grows tax free.
- And third, the HSA money used to pay for eligible medical expenses is still exempt from federal income taxes. And these medical expenses include long-term care insurance, Medicare Part A or B, Medicare HMO, and employer-sponsored retiree health insurance premiums.
Of course, not everyone can open an HSA. According to the IRS, to be an eligible person and qualify for an HSA, you must meet the following requirements:
- You are covered by a High Deductible Health Plan (HDHP), described below, on the first day of the month.
- You have no other health coverage than what is allowed under âother health coverageâ, described below.
- You are not registered for Medicare.
- You cannot be considered a dependent on someone else’s 2020 tax return.
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And like most pension plans, there are contribution limits. The annual HSA contribution limit for 2021 is $ 3,600 for self-employed individuals and $ 7,200 for family coverage, according to Tax procedure 2020-32. People 55 and over can contribute an additional $ 1,000 to their HSA.
The IRS also just announced inflation adjustments for HSA contributions for 2022. People with stand-alone coverage in a high-deductible health plan will be able to contribute up to $ 3,650 to an HSA in 2022. Those with family coverage can save a maximum of $ 7,300 next year.
Currently, most HSA account holders apparently use the money in their accounts to pay for routine medical bills, and most of the money is invested in safe, interest-paying investments.
But 4% of HSA account holders invest their money in mutual funds in the hopes of building a nest egg large enough to pay some or all of the health costs in retirement, which can be significant when they are. considered a present value.
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the Employee Benefits Research Institute, for example, estimates that a 65-year-old couple would need $ 168,000 set aside to have a 50/50 chance of sufficiently covering medical premiums and median spending on prescription drugs in retirement and $ 270,000 for have a 90% chance of paying these costs.
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So when might you consider investing the money in your HSA for health care expenses in retirement?
According to Keith Whitcomb, chief analytics officer at Perspective Partners, it makes more sense that you have enough money set aside – either in the HSA or somewhere else, like a 401 (k) loan, HELOC, or fund of emergency, to cover planned medical events as well as unforeseen medical events.
If you don’t need the HSA for payment of routine medical expenses, Whitcomb recommends keeping all receipts for eligible medical expenses that you pay out of pocket with after-tax funds. By doing this, “you are maximizing the investment benefits of the HSA and effectively creating a cash reserve usable for any purpose based on the cumulative value of the receipts recorded,” he wrote in a recent article in the. Retirement Daily.
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Another thing to consider if you are saving money in an employer sponsored HSA and also saving for retirement in an employer sponsored retirement plan such as a 401 (k) is: The order and the amounts to be saved on each account.
Fidelity Investments, for example, recommends the following:
- Consider contributing enough to get your employer’s match in your 401 (k), and set aside enough for this year’s medical bills in your HSA.
- Once you’ve saved up enough to get your employer’s match in your 401 (k) and cover your health care expenses in your HSA, you can focus on maximizing your HSA.
- Once you’ve maximized your HSA contributions, also focus on maximizing your 401 (k) contribution.
Read more on How to Fund Your HSA and 401 (k).
So how could you invest money in your HSA? The first thing to know is that your HSA is under your control, according to Whitcomb.
âJust like your checking, savings, and brokerage accounts, you can open and close health savings accounts at other institutions, and even have multiple HSAs,â he writes.
So if your current HSA offers an option to invest your funds or has a limited menu of investment alternatives, consider using another HSA.
Next, think about your asset allocation. According to Whitcomb, the asset allocation strategy for your HSA should be similar to your other long-term accumulation accounts. And, as you approach retirement, he recommends that you may want to prepare the account to handle the cash needs of your retirement medical expenses.