Using an HSA as a Retirement Savings Strategy
Are you using a health savings account (HSA) as part of your retirement plan? If not, you could be missing out. This article covers why HSAs can be a valuable part of your retirement savings toolkit.
What Is a Health Savings Account?
Health savings accounts (HSAs) were created to help make health care costs more affordable. Like a 401(k) or traditional IRA, HSAs are tax-advantaged. And like a flexible spending account (FSA), they can pay for a wide range of qualified health care costs, including:
Doctor’s fees
Dental treatments
Eye exams and eyeglasses or contact lenses
First aid supplies
Acupuncture
Insulin
Wheelchairs
Flu shots
Therapy or counseling
… and the list goes on!
What’s more, a health savings account lacks the “use it or lose it” requirements of an FSA. That means you don’t need to spend the balance each year but can accumulate it—which leads us to why HSAs can be a powerful retirement-savings vehicle.
Why an HSA May Belong in Your Retirement Plan
HSAs bring triple tax benefits to the table. The federal government allows you to:
Make pre-tax contributions to an employer-sponsored HSA, reducing your taxable income (if you make after-tax contributions, you can take an above-the-line tax deduction)
Allow the contributions to grow tax-free
Take tax-free distributions for qualifying health care expenses
You also do not face the required minimum distributions (RMDs) that your 401(k) or traditional IRA does. You can let the money sit in the account as long as you wish.
These advantages make HSA funds a potentially valuable tool for paying off medical expenses in retirement. By paying for your health care costs out of pocket now, you can allow your contributions to grow for your eventual retirement.
Once you reach age 65, you can take distributions for any reason without penalty, although the distributions will be taxable if they are not used for qualified medical expenses. As this Investopedia article points out, this may not be as detrimental to your retirement finances if you are in a lower tax bracket. Plus, having another income “bucket” could help increase your tax flexibility.
California Residents, Take Note
Our Roseville, California-based wealth management firm often incorporates HSAs into our clients’ financial plans, but HSAs do come with a caveat for California taxpayers: The state does not follow the same tax-advantaged rules that the federal government does.
As this Forbes article states, your contributions to a health savings account are taxable at a state level, as are any annual dividends, interest, or capital gains distributions. For this reason, you might consider an HSA akin to a brokerage account on the state level.
But you will make tax-free distributions as a California taxpayer, and given the powerful federal benefits, we think HSAs can still be beneficial. You should talk to a tax professional or fiduciary financial advisor about your specific situation.
What Else Do You Need to Know?
To contribute to a health savings account, you need to have a high-deductible health plan. You can use your employer-sponsored HSA (which may be particularly useful if they offer matching contributions), but if you leave your job, your HSA is portable—you are the account owner, so the HSA goes with you.
For 2021, you can contribute up to $3,600 for individual coverage and $7,200 for family coverage. If you are 55 or older, you can make a catch-up contribution of $1,000. You can contribute to an HSA up to the point you enroll in Medicare.
If your HSA is a savings account, consider transferring it to an investment account so that it has the opportunity to grow.
Finally, save your receipts for your current out-of-pocket expenses. You can reimburse your costs at any time—there is no time limit as long as you owned the HSA at the time you incurred the expense.
If you are unsure about the role an HSA (or any retirement account) should play into your retirement or tax plans, consider talking with a fee-only, fiduciary wealth management firm. Your advisor can take a comprehensive view of your financial picture and goals and advise you accordingly.
Schedule a complimentary, 15-minute call with a fee-only, fiduciary financial advisor today to discuss your personal situation.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor serving the greater Sacramento area with an office in Roseville, CA. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country's leading professional association of fee-only financial advisors.