It’s beneficial to consider the various solutions you have for maximizing your retirement savings. Of course, there are traditional options like standard IRAs and 401(k)s that solely exist to help you boost your retirement savings. However, other options exist to help you cover medical costs associated with getting older while allowing you to invest and save for retirement.
This guide explores how to use your Health Savings Account (HSA) for retirement, how an HSA can complement Medicare funds in early retirement and considerations when choosing an HSA.
What Is a Health Savings Account (HSA)?
An HSA is a savings account for people with high-deductible health plans and is used to pay for eligible medical expenses. Your health plan’s annual deductible must be $1,650 or more for an individual or $3,300 or more for a family to qualify for an HSA. Some medical expenses an HSA might cover include:
- Surgery
- Prescriptions and over-the-counter medications
- Long-term care services
- Medical imaging and tests
- Mental health care
- Eye exams, contacts and eyeglasses
- Dental exams and treatments
You contribute to the HSA monthly and can use those funds to cover any qualified out-of-pocket medical expenses during the year.
Benefits of Using an HSA Retirement Plan
Here are some of the main advantages of using an HSA retirement plan:
- Triple tax advantage: If you’re really looking to save, HSAs come with a triple tax advantage. Contributions are made pre-tax in individual HSAs, funds grow tax-free, and eligible withdrawals are tax-free.
- Flexibility: You can use your HSA according to your long-term goals or day-to-day needs, allowing you to draw as little or as much as you need.
- No expiry date: You can keep your HSA when getting a new job, retiring or changing health plans. This feature is unlike a Flexible Spending Account (FSA), which requires you to spend all funds by the end of the year.
How to Use Your HSA as a Retirement Plan
It’s important to consider how you’ll use and handle your HSA funds before and during retirement to get the most out of your plan. Here are five ways to use your HSA as part of your long-term retirement plan.
1. Max out HSA Contributions by Age 65
HSA contributions are only tax-deductible until you enroll in Medicare when you reach age 65, so it’s beneficial to save up as much as you can until then. Currently, the yearly HSA contribution limits are $4,300 for individuals and $8,550 for families. If you’re 55 or older, you may make extra contributions of $1,000 annually.
How much you should have in your HSA at retirement depends on various factors. However, a 2024 study shows that individuals need to save between $184,000 and $217,000 to have a 90% chance of covering their health care spending needs after retirement. Couples should save between $350,000 and $413,000.
2. Invest Your Contributions
It’s important to consider what health risks you might experience when you’re older and consistently save up for those medical costs. HSA investment strategies are just as important as investing in other retirement assets, such as an IRA or 401(k). Making decisions with your portfolio in mind can help you improve your risk profile and diversification strategy.
Shop around for high-quality, low-cost investment options that are less aggressive than your overall retirement investment strategy. It helps to work with a financial professional who can advise you on the best course of action based on your financial situation and goals. Hold a portion of the savings in cash or low-risk investments to ensure you don’t take on too much risk if some of the investments perform less well than expected.
3. Avoid Using Your HSA for Nonmedical Withdrawals
Qualified withdrawals are tax-free, making them the best use for your HSA funds until you reach age 65 or older. Once you reach this age, you may withdraw money for nonmedical expenses, although those funds will be subject to ordinary income tax. These expenses might include charitable donations, leisure travel, home improvements and starting a business or side gig.
If you accidentally used your HSA for nonmedical withdrawals before age 65, you will be charged income tax and a 20% penalty.
4. Use the HSA for Early Retirement
Let’s say you plan to retire early but don’t yet qualify for Medicare. You can use the HSA as a bridge to pay for health insurance premiums during your retirement until you are eligible for Medicare. You can also use your HSA to pay for long-term care insurance in preparation for your later retirement years.
5. Leave the HSA to a Beneficiary
If you find you have no use for the HSA, you can pass it on to loved ones after your death. When passing it on to a spouse, they should also follow the qualified medical expense rules you did. When passing it down to another loved one who isn’t a spouse, such as your child, they will receive the balance of the account when you die. They will need to pay income tax on the amount minus qualified medical expenses used within the year of your passing.
What to Look for When Choosing an HSA
Before choosing an HSA provider, compile a list of convenient providers that can meet your needs and compare their offerings. Key criteria to consider include:
- Fees: Estimate a target amount you would want to spend on an HSA. When looking at the benefits of a particular provider’s HSA plan, consider their monthly account charges, investment fees and any potential hidden fees. Look for providers that may waive or reduce charges when you maintain a minimum balance.
- Payment and reimbursement options: Find out about the HSA provider’s reimbursement options and whether they offer fast reimbursement. For instance, some may offer debit cards that are incompatible with health care and insurance providers. It helps to work with a provider that processes reimbursements quickly.
- Independence: Getting an individual HSA gives you the advantage of handling your HSA balance on your own rather than depending on an employer or an intermediary to do things for you. Managing your account yourself makes for a faster process when you can upload receipts directly to the provider’s platform.
Leverage Accuplan’s HSA Program’s Valuable Features
Choosing the right HSA provider can help you maximize how well your HSA plan and strategies work for you. Accuplan Benefits Services offers various retirement solutions, from self-directed IRAs and 401(k)s to flexible HSA programs.
Our individual HSA programs allow you to earn idle funds and include a low- to no-cost structure with no hidden fees. Our platform also offers 24/7 access, allowing you to reimburse yourself quickly by uploading receipts immediately. We also have a dedicated support team to help you whenever needed. To get started, contact our knowledgeable team for more information or open an HSA account today.
Our information shouldn’t be relied upon for investment advice but simply for information and educational purposes only. It is not intended to provide, nor should it be relied upon for accounting, legal, tax or investment advice.