Leveraging HSAs for Retirement
Written By: Ryan Rink, CFP®, EA, ChFC®, CLTC®
Whether you’re just beginning to save for retirement or looking for ways to maximize your savings, incorporating a Health Savings Account (HSA) into your financial plan can offer significant benefits.
What is a Health Savings Account?
Before we explore the strategic use of HSAs for retirement, it’s essential to understand what they are and who is eligible to contribute to one. An HSA is a tax-advantaged savings account designed to help individuals save for medical expenses who have high-deductible health plans (HDHPs). Your employer’s human resources department will be able to confirm if you’re eligible to contribute to an HSA. If you get health insurance coverage through the open marketplace, your health insurance agent can confirm your eligibility.
HSAs are the only accounts with a triple tax benefit, which includes:
1 – Tax-Deductible Contributions: Contributions to your HSA are made with pre-tax dollars, reducing your taxable income for the year.
2 – Tax-Free Growth: Any interest or other earnings on the money in your HSA grow tax-free.
3 – Tax-Free Withdrawals: Withdrawals from your HSA for qualified medical expenses are tax-free.
While HSAs are intended for medical expenses, their benefits can extend far into retirement. Unlike Flexible Spending Accounts (FSAs), HSAs have no “use it or lose it” policy. Your account can grow over the years, providing a valuable resource for future medical expenses.
What Medical Expenses Qualify for Tax-Free Withdrawals?
There are many items you can pay for with your HSA account, but some examples include:
– Medical expenses not covered by your health insurance but are applied to your annual deductible
– COBRA premiums (Note: Health insurance premiums are generally not a qualified expense, but COBRA is an exception)
– Dental/Orthodontics
– Contacts/Glasses
If you’re retired and on Medicare, there are still plenty of health expenses that an HSA can help cover:
– Medicare Part B and D Premiums (NOT Medicare Supplemental Insurance)
– Dental (i.e. Crowns, Implants, etc.)
– Hearing Aids
– Contacts/Glasses
– Qualified Long-Term Care Insurance Premiums (Up to certain dollar amounts by age.)
– Chiropractor
– Prescription Medicine
In the rare event you happen to not need the balance for health-related expenses, you still have the ability to take penalty-free withdrawals from the account once you are over age 65. You’ll be required to pay income taxes on the withdrawals, but keep in mind you received a deduction when you made the contribution and had years of tax-deferred growth.
The following link provides a comprehensive list of what the IRS considers a qualified medical expense: irs.gov/publications/
How Do I Maximize the Benefits of My HSA?
Maximize Annual Contributions: If possible, contribute the maximum amount to your HSA each year. For tax year 2024, the IRS permits individuals to contribute up to $4,150 for individuals and $8,300 for families. An additional $1,000 catch-up contribution is allowed for those age 55 and older. Keep in mind any employer contributions count towards this limit. For example, if you are an individual and your employer contributes $1,000 annually to the HSA, you would only be allowed to contribute up to $3,150.
Invest Your HSA: Many HSAs offer investment options similar to those found in retirement accounts, such as 401(k)s or IRAs. Once your account reaches a certain balance, you may have the ability to invest in stocks/bonds/mutual funds, which can allow your savings to potentially grow at a much faster rate.
Save Your Receipts: For qualified medical expenses paid out-of-pocket, you can reimburse yourself from your HSA at any time. There’s no time limit on this, so you can let your funds grow in the interim and use the account as a tax-free reimbursement method in retirement.
What If I Die with an HSA Balance?
In short, the answer depends on whether the named beneficiary is your surviving spouse.
If the beneficiary is the deceased account holder’s surviving spouse, they become the new HSA account holder, and the transfer of ownership is non-taxable. The rules regarding distributions will be the same as they were for the original account holder.
If the beneficiary is listed as someone other than the deceased account holder’s surviving spouse, the remaining balance in the account is paid out to that beneficiary and will be reported as taxable income.
If you have questions regarding your Health Savings Account, please reach out to your Shakespeare Financial Advisor at (262) 814-1600.