We believe that Health Savings Accounts (HSA) are one of the best retirement accounts available and may be one of the first accounts you consider saving into for retirement. For many of us, Flexible Spending Accounts (FSAs) taught us to deposit money into the account for medical expenses, get the tax deduction, and spend the money before the end of the year otherwise we will lose the funds. Many individuals treat HSAs the same as FSAs; however, one important difference between the two is that with HSAs you can carry funds over into future years. Health care spending is one of a retiree’s biggest expenses. A recent study by Fidelity estimates that a 65-year-old couple retiring today will spend an average of $260,000 on health care costs in retirement.¹ Having funds within an HSA from years of saving can go a long way to covering those costs.
Turn Health Savings Accounts into Super-Charged Retirement Savings Accounts
Two distinct features can turn HSAs from a short-term medical expense bucket into a super-charged retirement savings account. The first feature is the ability to invest the savings. If, say, an individual makes a contribution into an HSA, he or she gets the tax deduction, and can invest the savings into a diversified mutual fund offering provided by the HSA sponsor. This may sound similar to IRAs or 401(k)s. The second feature, as mentioned above and unlike an IRA or 401(k), is an individual never has to withdraw money out of the HSA. This feature may sound similar to Roth IRAs.
Before retirement, consider using “non-HSA” funds to pay for your co-pays and various medical expenses. You then save medical receipts that you paid using after-tax money and reimburse yourself from the HSA. Currently, there is no expiration date for when someone can be reimbursed. For example, one can pay for a medical expense in 2017 with after-tax money, keep the receipt, and elect the reimbursement 30 years from now tax-free. Note that you will need to substantiate the reimbursement with the proof of receipt! Consider using an electronic vault to store copies of receipts so the ink doesn’t fade.
In Case of Health Emergencies
What if a health emergency arises before retirement, and you can’t afford to pay for medical expenses out of pocket? You do have the option of withdrawing from the HSA. As long as you use the funds for qualified medical expenses, then all withdrawals from the HSA, including gains on investments, are not taxable.
If you manage to avoid medical emergencies and can delay taking withdrawals, then you can treat the HSA as if it was an IRA at the saver’s age 65, if needed. Meaning any withdrawals that are not for qualified medical expenses after age 65 will be taxed as ordinary income. A non-qualified withdrawal before age 65 will incur a 20% penalty in addition to be treated as ordinary income.
Similar to traditional retirement accounts, tax savings is one of the biggest benefit to HSAs:
- Contributions are federally tax-deductible in the year in you make them.
- Withdrawals made for qualified medical expenses are tax free. This includes your contributions plus any growth on investments.
- Contributions made through payroll deductions avoid the 7.65% Social Security and Medicare taxes.
The tax benefits of HSAs are clear, but you should consider several factors.
Who is eligible to make contributions?
- You must be covered under a High Deductible Health Plan (HDHP).
- The HDHP is your only health insurance coverage.
- Someone else isn’t claiming you as a dependent on their tax return.
How much can you contribute each year?
- Individuals may contribute up to $3,400 in 2017.
- Those insuring a family can contribute up to $6,750 in 2017.
- Those age 55 and older may contribute an additional $1,000 per year.
- The number of Health Savings Accounts are unlimited. But your annual contribution limits are still maxed out by the bullets above.
If you are just starting out, or have been working for years, consider taking advantage of an HSA if you meet the above criteria. Due to the tax savings, ability to invest, and flexibility the account affords you, I recommend you consider making the HSA one of the first accounts you save to. Keep in mind, however, that everyone’s situation is different. You should still consult with your advisor to ensure an HSA is the right option for you.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.
This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.