How a Health Savings Account Can Help You in Retirement
Health Savings Accounts (HSAs) provide a tax-advantaged way to save for healthcare costs. While you may think of a health savings account as a way to save for and pay for current medical expenses, it is also an excellent way to save for retirement. This is because the funds in a health savings account can be invested and grow, leading to a tax-free amount to pay for healthcare costs in retirement. After age 60, the account operates more similarly to an Individual Retirement Account (IRA), allowing you to use the money for any purpose you want, and you will only pay income tax on withdrawals.
Retirement Rules for Health Savings Accounts
Like any tax-advantaged savings plan, there are some rules that dictate when and how you can use the money in a health savings account. For example, you are not required to take minimum required distributions (RMDs) from a health savings account like you would from an Individual Retirement Account (IRA) or a 401(k). As long as you use the money to pay for qualified healthcare expenses, you won’t owe any taxes on the withdrawal regardless of when you take it. But what if you withdraw the money to pay for non-qualified medical expenses? If you are under 65, the IRS imposes regular income tax on the withdrawal, and you may owe a 20% penalty. Once you reach 65, you are no longer subject to the 20% penalty. At that point, the health savings account effectively works like an Individual Retirement Account (IRA), except you can take tax-free withdrawals to pay for qualified healthcare expenses.
How a Health Savings Account Can Outperform Your 401(k)
While we typically think of retirement accounts like 401(k)s as major sources of funds in retirement, there are two key ways a health savings account can provide better benefits even as a retirement account: A health savings account gives you a triple tax advantage: While contributions to a 401(k) are pre-tax, withdrawals will be considered taxable income. Health savings accounts do not require minimum required distributions (RMDs): You can continue to allow your health savings account to grow even after you have to start taking minimum required distributions from a 401(k). This gives you more flexibility and control.
Health Savings Account vs. Health Reimbursement Arrangement (HRA)
A Health Reimbursement Arrangement (HRA) is another type of account that is similar to a health savings account. However, only the employer contributes to the health reimbursement arrangement, and HRAs cannot be taken with you to a new employer. This table outlines some key differences between a health savings account and a health reimbursement arrangement:
| Health Savings Account | Health Reimbursement Arrangement |
|---|---|
| If you change employers, you can take the account with you | If you change employers, you lose it |
| Both the employee and employer can contribute to the account | Contributions come solely from the employer |
| Requires a high-deductible health plan (HDHP) | Does not require a high-deductible health plan (HDHP) |
| Set by the federal tax authority | Set by the employer |
Opening a Health Savings Account
You can open a health savings account on your own or through your employer if they offer one. However, not everyone is eligible to open a health savings account. The following requirements must be met to open a health savings account:
- You must be enrolled in a high-deductible health plan (HDHP)
- You cannot
- You may be claimed as a dependent on someone else’s tax return
- You cannot be enrolled in a Medicare program
- You must not have any other type of health coverage
The high deductible health plan is determined by the annual minimum deductible and out-of-pocket expenses. The amounts change every year. For 2023, the minimum annual deductible for a high deductible health plan must be at least $1,500 for individual coverage and $3,000 for family coverage. The out-of-pocket limits cannot exceed $7,500 for an individual or $15,000 for family coverage.
Frequently Asked Questions (FAQs)
What can Health Savings Account funds be used for after retirement?
After age sixty, you can use the funds in your Health Savings Account to cover qualified medical expenses, as well as other expenses without incurring a 20% tax penalty. However, you’ll need to pay income taxes on any withdrawals you make from the Health Savings Account when using those funds for other purposes outside of qualified medical expenses.
How much should you have in your Health Savings Account for retirement?
There is no hard and fast number for how much you should have in your Health Savings Account for retirement. You should aim to save what you think you might need to cover medical expenses. This may include personal fees, prescriptions, over-the-counter medications, and more. Track your medical expenses to see how much you need in a year.
Source: https://www.thebalance.com/how-to-use-your-hsa-to-save-for-retirement-5188049
Source: https://www.thebalancemoney.com/health-insurance-that-is-also-a-retirement-plan-4156593
Leave a Reply