One of the best retirement savings vehicles that many people may not realize is a Healthcare Savings Account (HSA). An HSA is a tax-advantaged account created for individuals who are covered under high-deductible health plans (HDHPs) to save for medical expenses that HDHPs do not cover.
Rather than using these accounts for current medical costs, you should consider utilizing the multiple tax advantages associated with these accounts to help optimize for your retirement plan.
Similar to a 401(k) plan, contributions can be made into the account by you or your employer but are limited to a maximum amount each year. An HSA is also portable; if you change jobs, you still retain your HSA.
For 2019, the max contribution is $3,500 for an individual and $7,000 for a family. If you are over the age of 55, you can contribute an additional $1,000. For example, an individual under age 55 who opts for the maximum contribution limit of $3,500 can contribute only $2,000 if his employer contributes $1,500.
Contributions made to an HSA do not have to be used or withdrawn during the tax year. Any unused contributions can be rolled over to the following year. Also, an HSA plan can be transferred to a surviving spouse tax-free upon the death of the account holder.
Qualifying for an HSA
The HSA is usually paired with qualified HDHP and offered by a health insurance provider. An HSA can also be opened at several financial institutions. To qualify for an HSA, the taxpayer must be eligible, as per standards set out by the Internal Revenue Service (IRS). An eligible individual is one who has a qualified HDHP, has no other health coverage, is not enrolled in Medicare, and is not dependent on someone else’s tax return.
Triple Tax Advantage
HSAs are often referred to as having a triple tax advantage. Here is the tax advantage breakdown;
Withdrawals Permitted Under an HSA
HSA withdrawals that are used to pay for qualified medical expenses will not be taxed.
The Disadvantages of Health Savings Accounts
While I believe that the advantages of having an HSA far outweigh the disadvantages, there are a few things that you should know when it comes to an HSA;
Why it Makes Sense to Utilize an HSA Within Your Retirement Plan
I know that many people who utilize an HSA spend their account rather than letting their assets accumulate and grow. For some, this is a necessity due to balancing their family cashflow needs. However, for those of you who can forgo drawing down your account, I strongly suggest that you utilize these assets as part of your retirement plan for the following reasons.
By treating your HSA no different than you treat your employer-sponsored retirement plan and IRAs, you can build a sizable asset that can be utilized throughout retirement.