HSAs Can Increase Your Retirement Savings

HSAs Can Increase Your Retirement Savings

| October 01, 2020

Opening a health savings account (HSA) offers a triple tax advantage. To qualify, you must be in a high-deductible health insurance plan (HDHP), you cannot be enrolled in Medicare, and you cannot be participating in another health insurance plan. Unlike an IRA contribution, you do not have to have at least one spouse with earned income to qualify.

For 2020, the HDHP must have minimum deductibles ($1,400 for an individual and $2,800 for a family) and maximum out-of-pocket costs ($6,900 for an individual and $13,800 for a family for 2020). If your plan meets these requirements, then you may be able to fatten up your retirement savings with an HSA.

HSAs offer three potent tax advantages: Contributions are tax-deductible, interest and earnings grow tax-deferred, and distributions are tax-free when used for qualified medical expenses.

These accounts were created to help people in HDHPs pay for current medical expenses, but the money saved in HSAs can also be used for health care or other expenses in retirement. There is no "use it or lose it" provision. Any money left in an HSA at the end of the year belongs to the account owner and remains in the account, growing tax-deferred, until it is distributed.

An individual can contribute up to $3,550 to an HSA in 2020, and for family coverage you can contribute up to $7,100. If you're 55 or older, you can make a catch-up contribution and save an additional $1,000 in your HSA each year. The money in your HSA is yours if you change employers. Most HSAs offer investment options, giving you the opportunity to grow your savings tax-deferred over a long period of time, if you don't use the money for medical expenses.

At age 65, the money in an HSA can be used to help pay Medicare premiums tax-free or be withdrawn as a taxable distribution for any non-medical purpose, similar to an IRA distribution.

An HSA allows you to set aside pre-tax dollars, grow earnings tax-deferred, and pay no taxes on distributions used for qualified medical expenses. It's a win-win-win opportunity.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.