If you’re looking to maximize your retirement savings, using your Health Savings Account (HSA) could be a wise choice. Not only can HSAs help pay for current medical expenses, but they can also be utilized as a supplementary retirement plan, similar to traditional options like 401(k)s or IRAs.
Here’s what you should know about HSAs and how they can be used to boost your retirement savings.
What is an HSA and how does it work?
HSAs are savings accounts that can be used to pay for medical expenses for those with high-deductible health plans. In order to be eligible for an HSA, your health plan’s annual deductible cannot be less than $1,500 for an individual in 2023, or $3,000 for a family (or $1,600 and $3,200, respectively, in 2024).
Here’s how HSAs work: You or your employer can contribute funds to the HSA, which can then be used to cover your out-of-pocket medical costs during the year. Contributions are tax-deductible and the money can be invested within the HSA and grow tax-free. Withdrawals are also tax-free as long as they are used for qualified medical expenses, making HSAs a triple-tax advantaged savings tool, according to many experts.
In 2023, the HSA contribution limit is $3,850 for individuals and $7,750 for families (and $4,150 and $8,300, respectively, in 2024). If you don’t have any medical expenses for a particular year, the money can continue to sit and grow in the account without any withdrawal requirements.
Using an HSA as an additional retirement plan
In addition to using an HSA for medical expenses, it can also be used as another way to save for retirement. Once you reach age 65, money held in an HSA can be withdrawn and used for any reason, the only catch being that you’ll pay ordinary income taxes on withdrawals not used for qualified medical expenses.
This means that your HSA can essentially function similarly to 401(k) plans or IRAs. You’ll get tax deductions for contributions and the money will be able to grow tax-free until you reach retirement. While the amount you can contribute each year to an HSA is lower than that of 401(k)s and IRAs, it still gives a nice boost to your retirement planning. Catch-up contributions are also available for HSAs beginning at age 55, when you can contribute an additional $1,000.
However, money withdrawn prior to age 65 that is used for non-qualified expenses is subject to a 20 percent penalty.
How to invest your HSA
When it comes to investing in your HSA, you’ll likely want to be fairly conservative until you’ve built up enough to cover your expected medical expenses over the next few years. Remember that this money is first intended to help with the costs you’ll pay because of your high-deductible health plan, so taking on too much risk with your investments could mean that the money isn’t there when you need it. It probably makes sense to always hold a portion of your HSA in cash, money-market funds or other low-risk investments, for this reason.
However, once you feel you have saved enough to cover likely expenses for a few years, you can treat your HSA similarly to other retirement accounts. You can build a portfolio of stocks and bonds using mutual funds or ETFs. Index funds allow you to get diversified exposure to the markets at a low cost, which is part of why they’re so popular with investors. Some providers will even let you invest your HSA in individual stocks, but keep in mind that this comes with additional risks and you’ll want to research each holding before investing.
Bottom line
HSAs can be great tools for saving money for future healthcare costs, but can also serve as another option for saving towards retirement. Withdrawals for qualified medical expenses are tax-free at any age but once you reach age 65, you can use your HSA money for any reason as long as you pay taxes on withdrawals used for non-medical expenses. This allows the HSA to function similarly to traditional retirement plans like 401(k)s and IRAs and can give your portfolio an extra boost toward achieving your retirement goals.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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Health Savings Account (HSA): An HSA is not just a means to cover current medical expenses but a strategic vehicle for augmenting retirement savings. To qualify for an HSA, individuals must have a high-deductible health plan, with annual deductibles not less than $1,500 for an individual and $3,000 for a family in 2023 (or $1,600 and $3,200 in 2024). Contributions to HSAs, made by either the individual or the employer, are tax-deductible. The accrued funds within an HSA can be invested and grow tax-free, with withdrawals being tax-free if used for qualified medical expenses.
In 2023, the contribution limit for HSAs is $3,850 for individuals and $7,750 for families, and it increases to $4,150 and $8,300, respectively, in 2024. Importantly, any unutilized funds can roll over, continuing to grow without withdrawal requirements. This triple-tax advantage makes HSAs a powerful savings tool.
HSA as a Retirement Plan: Beyond covering medical expenses, an HSA serves as an additional retirement savings avenue. Post the age of 65, withdrawals from an HSA can be used for any purpose, albeit subject to ordinary income taxes if not directed toward qualified medical expenses. This parallels the functionality of traditional retirement plans such as 401(k)s or IRAs. While annual contribution limits are lower than those for 401(k)s and IRAs, HSAs offer a valuable boost to retirement planning. Notably, catch-up contributions are permitted starting at age 55, allowing an extra $1,000 contribution.
However, withdrawals before age 65, used for non-qualified expenses, incur a 20 percent penalty, emphasizing the importance of strategic planning.
Investing Your HSA: When investing in an HSA, a prudent approach involves conservative investments until sufficient funds are accumulated to cover expected medical costs. Given the primary purpose of addressing high-deductible health plan expenses, maintaining a portion in cash, money-market funds, or low-risk investments is advisable initially. Once a comfortable reserve is established, the HSA can be treated like other retirement accounts. Building a diversified portfolio of stocks and bonds through mutual funds or ETFs is a common strategy. Index funds, providing low-cost diversified exposure to markets, are particularly popular. While some providers allow investment in individual stocks, this entails additional risks and requires thorough research.
Bottom Line: In essence, HSAs offer a dual benefit of covering medical expenses and contributing to retirement savings. Tax advantages, flexibility in usage post-retirement age, and the potential for investment growth make HSAs a compelling tool for financial planning. Strategic investment choices aligned with individual risk tolerance and financial goals are crucial for maximizing the long-term benefits of an HSA. Always remember, due diligence and independent research are essential for making informed investment decisions, and past performance does not guarantee future results.
