Everyone wants more. More savings. More retirement funds. More money! This is simple, getting there is the hard part. It takes dedication and foresight to plan for your retirement. Understanding how you can save (tax-free money) for retirement is the starting point for all discussions and strategies that follow.
What if you could have one more tax-free retirement account? Sound too good to be true? In fact, the tax structure of a HSA creates similar tax-savings of a 401(k) and an IRA but with an extra tax advantage!
As a quick refresher, an HSA or Health Savings Account is a personal savings account for health expenses. An HSA is not a health plan but can be used in conjunction with HSA-eligible health plans, like HDHPs, to save tax-free dollars on health expenses.
HSAs allow for tax-deductible contributions, tax-free interest and tax-free withdrawals (for medical expenses). In 2019, individuals can contribute up to $3,500 in tax-free savings and families can contribute $7,000.
HSAs create dedicated savings for health expenses that can be used this year or for years to come, tax-free.
HSA & Retirement
Healthcare costs might not the be the first thought when you imagine post-work life. Healthcare cost are expected to exceed $275,000 per couple in retirement. This is on top of Medicare coverage. Your HSA will ensure you have earmarked money for these expected costs and prevent you from using your 401(k) or IRA savings for health expenses.
Wouldn’t you rather spend your hard-saved retirement savings on leisure experiences or travel? Adding an HSA ensures that is an option.
HSA vs. 401(k)
Both a 401(k) and HSA create tax-free savings opportunities. Coupled together, this is an incredible opportunity to save more money and build a nest egg for retirement.
With a 401(k), you must wait to use those dollars until you are 59 and 1/2 years of age unless you are willing to pay early withdraw penalties. With an HSA, you can use your tax-funds for qualified out-of-pocket medical expenses at any age. After 65 years of age, you can use your HSA funds for anything, just like a 401(k) or an IRA.
Unlike a 401(k), an HSA has no mandatory distributions in retirement. You get to decide when and if to use those pre-tax funds.
401(k)s are the gold standard of retirement savings, but an HSA might be the new stealth 401(k). Understanding the tax structure of an HSA enables you to save more money for retirement. While this might not have been the intended use case, an HSA is a perfect complement to your existing retirement accounts. It’s just another way to save more.
You can check to see if you have an HSA-eligible health plan here.