How to use a Health Savings Account (HSA) in Retirement
Does your company offer a Health Savings Account (HSA)? If you have a high deductible health care plan through your employer, it is likely you have an HSA available to you. If so, understanding how to make the most of a Health Savings Account can provide huge tax benefits, if utilized strategically. Below, discover what a Health Savings Account is, the tax benefits you may receive, and how to use those benefits once you reach retirement.
What is a Health Savings Account (HSA)?
Health Savings Accounts (HSAs) are a type of savings account that allows you to set aside pre-tax funds to pay for qualified medical expenses. HSAs can provide a great vehicle for long-term tax planning. They allow a deduction against your income for contributions in that year, tax-free growth if invested, and tax-free distributions for qualified health expenses. If used properly, the HSA can provide significant opportunities, providing tax-free assets for future health or long-term care costs that may come up as you age. HSA accounts are portable, meaning if you separate from your employer in the future, you can take these funds with you.
You may have also heard of the similar FSA account type, or Flexible Spending Account. Flexible Spending Accounts (FSA) are a type of savings account that allows you to set aside pre-tax funds to pay for qualifying out-of-pocket heath care costs. These funds are set aside from your paycheck and provide income tax benefits to those that utilize them. Unlike HSAs, FSA funds are not portable and are owned by your employer.
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What are the Benefits of a Health Savings Account?
Health Savings Accounts (HSAs) were created as a savings vehicle for those with high deductible health plans. A Health Savings Account allows you to save funds to help offset the higher deductible that comes with your health coverage. However, in utilizing an HSA, you also receive some tax benefits. This is because the money you contribute to an HSA is deductible from your taxes in the year you contribute, and the distributions, as long as taken for qualified expenses, are tax free as well. One slightly lesser-known tax benefit, however, is that the earnings in an HSA grow tax free as well. So, those who contribute and invest these funds for the long term can use HSA accounts for tax deferral, tax-free growth, and tax-free distributions. If taken out correctly, these funds may never be taxed. For those with little ongoing medical expenses, the benefits of leaving your assets in the HSA, investing for the long term, and experiencing the tax benefits later can provide great opportunities for the future. Much further down the road, you can utilize these invested funds for health or long-term care costs. The larger your account grows over time, the larger the tax benefits you can recognize.
Who Qualifies to Save Into a Health Savings Account?
You must have a high deductible health plan to be eligible to contribute to an HSA. Employers who offer high deductible plans often make an HSA option available through your benefits and may even make a contribution on your behalf each year. However, for those who do not have an HSA account set up through their employer, you can also explore options with a bank, as long as you are enrolled in a high deductible health plan.
Additionally, some may have had a high deductible health plan with a previous employer and now have an HMO, a type of health plan that limits your coverage in-network, or PPO, a type of health plan that provides in- and out-of-network coverage. This does not mean you are ineligible to maintain your previous Health Savings Account, it just means you may no longer be eligible to make new contributions moving forward.
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How to Use HSA Benefits in Retirement
One of the greatest opportunities with HSA accounts is to defer using these funds until retirement. For those with lower ongoing health care costs, consider using HSA funds as another long-term investment vehicle, similar to your 401(k) or IRAs. You will receive the tax benefits mentioned above, and often these funds can be used in retirement tax-free for medical costs, as the definition of qualified expenses is broad and includes Medicare premiums, long-term care costs, and more. That said, you can still use HSA funds for other retirement expenses to support your lifestyle such as traveling costs, living expenses, and more.
In order to use your HSA funds for non-medical expenses, you must wait until age 65 to access them without penalty. Similar to a 401(k) or IRA, these distributions after age 65 would be taxed if not used for qualified medical expenses.
How to Maximize Your HSA Contributions
HSAs are typically offered by employers along with your group benefits, and often they may make an annual contribution on your behalf to offset the higher deductible and their lower health plan costs. In addition, you can contribute up to a total of $3,850 for individuals (meaning you are the only one insured on the health plan) or $7,750 for families (on a family medical plan), noting that this total reflects the contribution between both you and your employer. Over the years, many clients have not realized they were receiving employer contributions to their HSA accounts.
So, if you find yourself with this type of health care plan and aren’t sure if you have an HSA, it may be wise to check your employer benefit portal. Many times, during the financial planning process, we discover that our clients were unaware of funds their employers had set aside and were sitting in cash. If you find you have an HSA account balance already, consider whether you should invest the funds or not based on your needs.
Utilizing an HSA can be very powerful but isn’t for everyone. It’s important first to weigh the pros and cons of a high deductible health plan vs. a more traditional HMO or PPO option. Assuming the high deductible plan does make the most sense, the way you fund and utilize your HSA may be different for your situation. If you do have questions or want to find out if you have an HSA available to you, please reach out and we can help you evaluate your options.