“Most people do not know that a Health Saving Account can be used after your working time to help offset medical expenses that Medicare does not pay, this can be a huge financial relief during retirement years.” Donna McElroy
Most people have it drilled into their heads that they should always max out their qualified workplace plans. They believe that maxing out a qualified plan is the very best way to save for retirement. But, what about Health Savings Accounts (HSAs) offered by many employers? Could these underutilized benefits hold the key to paying fewer taxes and a method to offset out of pocket expenses during retirement years?
Created by the government to help people with high-deductible health insurance plans (HDHPs) pay for out-of-pocket medical expenses, HSAs are tax-advantaged plans offered through employers.
While about 33 million people have access to HAS-eligible health insurance plans, only around 22 million opted to participate. In 2020, approximately 43% of US employers offer HSAs.
How do HSAs work?
HSA-eligible plans are health plans with deductibles of at least $1,350 for individuals and $2,700 for families. If you enroll in an eligible health plan, you can start an HSA. Your company’s human resources department may have emphasized HSAs as a way to cover current out-of-pocket medical expenses. However, HSAs also provide compelling “triple-tax-free” components, making them attractive as a way to save for retirement.
Most people start HSAs at work, contributing pre-tax via payroll deductions. These pre-tax contributions are not subject to FICA taxes. HSAs may also be created outside the workplace and funded with after-tax dollars. Doing this means that a person can take a deduction on their income taxes.
HSA contributions accumulate tax-free and are withdrawn tax-free to pay for both current and future medical expenses, including medical costs in retirement. Even better is the fact that, unlike typical flexible savings accounts (FSAs), your HSA money rolls over year to year. You have the potential to earn interest and can take the HSA with you if you change jobs.
For 2020, if you have an approved individual health plan (HDHP), you can contribute as much as $3,550 to an HSA. If you have a family plan, that amount increases to $7,100. Also, eligible employees age 55 or older by the end of the tax year can access a “catch-up contribution limit” that lets them add up to $1,000 more to their accounts.
HSAs give you three times the tax savings.
An HSA, then, is one of the most tax-efficient savings options around. That’s why you definitely want to look into contributing the maximum to an HSA account and paying your current health care expenses with other money. If you’re going to get the most out of HSA compounding, you should not spend your HSA money unless it’s necessary. When you think about the tax advantages of an HSA, ask yourself: When do I want to pay taxes on my HSA contributions and earnings? Do I want to pay now or later?
How would it be NEVER to pay taxes on that money?
Tax-free can happen if you use your HSA money to pay for qualified medical expenses. For those lucky enough to have maxed out their 401ks and IRAs, HSAs offer you another way to save on taxes. Health savings accounts provide “triple tax savings.” You contribute pre-tax money, pay zero tax on earnings, and can withdraw the funds tax-free now or use them to pay for qualified medical expenses when you retire.
After age 65, if you use the funds for non-medical expenses, the IRS taxes this money in much the same manner as a 401(k) or traditional IRA. Another thing to consider is that if you are under age 65 and take cash out of your HSA for non-medical reasons, The IRS will stick you with a 20% penalty in addition to taxes.
Still, if you are looking for additional, tax-advantaged ways to grow your wealth and are still working, you need to look into getting an HSA. An HSA is one of the most underutilized tax-efficient savings options around.
As you age, you will likely face many unexpected health care issues and expenses, perhaps even nursing home or in-home care needs. By some estimates, the average couple in retirement will need around $295,000 after taxes to take care of health-related costs. An HSA is an excellent way to build up a separate pool of money to meet those expenses. You’ll be able to save less, too since withdrawals from an HSA are not taxed.
HSAs can be your secret weapon in the fight against forces that eat into your nest egg. Talk to your human resources department and your financial advisor or CPA to see if having an HSA makes sense for you.