HSA Retirement Tips
HSAs, or health savings accounts, are accounts available to those that have high deductible health care plans. What does this have to do with your retirement planning? Plenty!
HSA vs FSA
HSAs are often confused with another type of account used in healthcare spending, the FSA. FSAs are flexible spending accounts and there is no requirement on the type of health plan that you have. When you have an HSA, you are required to have a high deductible health plan (HDHP). To use an HSA, you can’t be enrolled in Medicare or declared as a dependent. Both HAS and FSA accounts are generally offered through your employer.
Here’s where you start to see some differences – if you switch employers, you can bring your HSA money with you, but not your FSA money. Whatever money you don’t use each year in your HSA rolls over to the next year, whereas there are limits on rollover amounts for your FSA account. FSA accounts are intended to be used up each year, whereas the HSA account may be used as a long-term savings strategy.
HSA and Retirement Planning
How can you utilize your HSA account for retirement planning? To start, you can max out the contribution amount for each year that you’re able. By doing this, you’ll be contributing pre-tax, allowing the money to grow tax-free, and taking it out without a tax penalty (assuming that the money is being used for medical expenses with appropriate receipts). In 2022, the limits are $3,650 for self-coverage and $7,300 for family coverage. If you are already over the age of 55, you can contribute an additional $1,000 per year.
You can also make contributions for the previous tax year through April 15th of the next calendar year. For example, you can contribute to your 2021 HSA through April 15th of 2022.
If your employer offers a match on your HSA, try to contribute enough to meet that match. In an HSA account, the employer match is factored into the total amount that you’re able to contribute – so you need to be aware of how much your employer is contributing and subtract that from your maximum contribution amount.
An important part of utilizing your HSA for investment purposes is the recordkeeping component. Reporting distributions depends on the expense being a qualified medical expense as defined by the IRS. As such, if you use your distribution for that qualified medical expense, you’re not held to paying taxes on the distribution. You will need to keep a good record of your expenses with receipts, medical bills, etc. that match the withdrawal amounts. Those same medical expenses can’t be taken as an itemized deduction in that tax year.
If you fail to keep good records, you will be held to the tax penalties on the distribution amounts. There is a 20% tax on a withdrawal that is not used for a qualified medical expense. There is an exception stated by the IRS that there is no additional tax on distributions made after the date you’re disabled, turn age 65 or die.
Using HSA Funds In Retirement
Theoretically, you could contribute to your HSA tax-free, and let that money grow tax-free. As you age, keep good records of all your medical expenses. When you retire, you can withdraw that money, tax-free, if you have receipts for each withdrawal amount. Use this money to pay for medical expenses in retirement.
While your IRA or 401(k) account is subject to a required minimum distribution (RMD) once you hit 72, HSA accounts are not.
Use your HSA, if you have one, as another tool in your toolkit while planning for retirement. A qualified financial planner can help you determine the best investment strategies for your personal situation.
This post first appeared on Forbes.