Matthew A. Treskovich
With taxes set to go up, health savings accounts offer an additional opportunity for retirement savers to build wealth and save for retirement.
Health savings accounts, also known as HSAs, were created by Congress in 2004 to encourage people to save money for future medical expenses. The rules governing HSAs give these accounts unique advantages as a long-term retirement planning tool.
HSAs offer tax advantages
Health Savings Accounts offer big tax advantages that aren’t found in any other kind of account.
Contributions made by your employer are not included in your taxable income. The same is true for contributions you make via payroll deduction. If you contribute directly to an HSA, you can deduct the contribution on your tax return as an adjustment to income, even if you don’t itemize deductions. Your HSA balance can be invested in the stock market. You won’t pay taxes on interest, dividends, or capital gains inside your HSA. Withdrawals, including gains, are tax-free if you spend the money on qualified medical expenses.
To be eligible to contribute to an HSA, you must be covered by a qualifying health insurance policy, called a “High Deductible Health Plan.” For 2021, the contribution limits are $3,600 for individuals and $7,200 for families. After you reach age 55, you are eligible for an additional $1,000 catch-up contribution.
Unlike most other types of retirement plans, there are no income limits on who can contribute to an HSA. Contribution limits for HSAs are separate from other retirement plan limits. You can still maximize your HSA contribution after you max out other retirement plans. High income earners who aren’t eligible to contribute to a deductible IRA or a Roth IRA can sill make deductible HSA contributions.
HSAs and retirement
When you enroll in Medicare, you are no longer eligible to contribute to an HSA. The money in your health savings account still belongs to you and can be spent tax-free if you follow the HSA rules.
Most people will have more health issues and spend more on health care in retirement than while they are working. This makes HSAs a smart way for retirement savers to save for health care expenses in retirement. Funds from an HSA can be used to pay Medicare premiums. Qualified long term care insurance premiums and many long-term care expenses are also eligible.
There is no time limit on when you need to pull money out of your HSA to cover medical expenses you’ve paid out of pocket. If you save your receipts, you can allow your health savings account money to grow tax-deferred for years or even decades before you take tax-free distributions.
Savers who start early and invest wisely can see their HSA balances grow into hundreds of thousands of dollars. As with any retirement savings plan, the sooner you get started, the better. The rules for eligibility can be complicated. It’s important to seek the advice of a tax and financial planning expert if you want to maximize the benefits your HSA can provide.
Matthew A. Treskovich is the chief investment officer at CPS Investment Advisors of Lakeland.