Health Savings Accounts (HSAs) can be a way to help you achieve your retirement goals. The primary purpose of a Health Savings Account is to provide a tax advantage while saving for and paying healthcare expenses. However, HSAs can also be utilized in other ways with the same tax benefits. If you are in good health and have an HSA, yet don’t have many medical expenses, you may find that an HSA also allows you to save more for retirement.
What is a Health Savings Account?
A Health Savings Account is a fund that some people can create to pay for their future healthcare expenses. To be eligible for an HSA, you must be covered by a high-deductible health plan (HDHP). Typically, the cost of an HDHP is lower than that of standard health plans, so you have the option to use the premium savings to fund your HSA tax-free.
What are High-Deductible Health Plans?
High-deductible health plans do not provide much coverage for routine healthcare expenses, such as visiting a doctor for suspected flu. The main purpose of these plans is to handle major expenses, such as surgeries or other events that involve hospitalization or emergency transport. You will pay more out of pocket to cover routine costs and major expenses until the maximum deductible is met.
How much can you contribute to a Health Savings Account?
The amount of money you can add to an HSA may change each year based on inflation and will differ depending on the type of plan you have and your age. The annual contribution limits for HSAs are as follows:
- For 2022, the contribution limits for HSAs are $3,650 for individual coverage and $7,300 for those with family coverage. For 2023, the contribution limits for HSAs are $3,850 for individual coverage and $7,750 for those with family coverage.
- HSA account holders who are over 55 can contribute an additional $1,000 each year.
The money you add to your HSA, as long as it is within the annual contribution limits, is 100% tax-free. When you add money to an HSA, it can come directly from your paycheck or directly from you, but regardless of how it is done, it results in a tax deduction above the line on your income tax return. You do not need to itemize deductions to receive this tax treatment when adding funds to your HSA.
When is the deadline to add money to a Health Savings Account?
Contributions to HSAs can be made until the tax filing deadline each year, which is typically April 15 for the previous fiscal year unless there is a holiday or an extension of the tax filing deadline. For instance, you can make contributions that count towards the current tax year until the tax filing deadline for the following year.
You can use this extra time to add additional funds to your HSA if you haven’t already reached the limit through payroll deductions during the fiscal year. To do this, you will need to make direct contributions to your HSA by writing a check or setting up a direct transfer from your bank account.
How can a Health Savings Account help you plan for retirement?
A Health Savings Account can help you achieve your retirement planning goals in two main ways. First, you can pay for qualified healthcare expenses (before or after retirement) using the funds (and any earnings) in your HSA. Second, you will not pay any taxes on these withdrawals. In fact, you receive tax-free growth on the money you add to an HSA that you earmark for covering healthcare expenses, whether you use it or not.
The advantage
The primary advantage of a health savings account occurs if you are fortunate enough to be in good health and avoid major healthcare bills. Since health savings account balances accrue each year, you can accumulate a substantial amount of money in your account if you do not spend it. You can withdraw your health savings account funds for any reason after age sixty and five years, without penalties or fees, if you have accumulated more money in the account than you need for healthcare expenses after retirement. You will only pay the basic income taxes, similar to a standard IRA distribution.
Be sure to compare your current taxes with what you would pay if you kept the money in a health savings account for retirement. Taking money from your health savings account for non-health-related reasons after reaching age sixty can move you into a higher tax bracket and make you pay more taxes.
If it aligns with your health needs and expectations, consider starting a health savings account or increasing the funding of a health savings account if you have exhausted your contributions to other retirement savings accounts.
Consider these three factors and the results they can provide for you:
- Your employer can contribute to your account.
- You can contribute to your account through payroll deductions.
- You can contribute after-tax.
If your employer contributes, you are essentially getting an extra paycheck, and the amount is not taxed. In other words, contribution amounts deducted from your payroll reduce your gross income, which lowers your tax bill for that year. If you contribute after-tax, you can also deduct the amount from your taxes.
If you can access these three contributions (up to annual limits), you will ultimately have a tax-advantaged account that helps you build tax-deferred wealth, helping you build tax-deferred wealth, helping you build tax-deferred wealth, helping you build tax-deferred wealth…
Source: https://www.thebalancemoney.com/health-savings-accounts-is-an-hsa-another-retirement-plan-2894460
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