How to Use HSA as a Smart Change Retirement Plan: Personal Finance
Whether you’re in the early stages of your working years or nearing retirement, one of the biggest burdens that can dampen your golden years is health care expenses.
In fact, a recent study by Fidelity Investments found that the average 65-year-old couple would need to save $315,000 for health care expenses. And that’s after taxes.
But one tool that can help you save on health care costs in retirement is a Health Savings Account (HSA).
What is HSA?
An HSA is a tax-benefits way of savings paired with a High Deductible Health Plan (HDHP) to help people pay for eligible health care. It is famous for its triple tax benefits.
- The money you contribute to Hayel Saeed Anam is tax deductible. So you can lower your taxable income and your tax bill for the year you contribute.
- Money in an HSA grows tax free.
- Withdrawals for eligible healthcare expenses are tax-free.
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In many ways, an HSA works similar to a traditional Individual Retirement Account (IRA) or 401(k). But HSAs have significant advantages. If you withdraw money from a traditional IRA or 401(k) to pay medical bills, the withdrawal will be taxed as ordinary income.
But if you instead take advantage of your HSA, you won’t owe any federal taxes on the withdrawal as long as the expense is “qualified.” So what exactly are eligible medical expenses?
Medical expenses eligible for an HSA may include:
- joint payments.
- joint insurance.
- Health insurance discounts.
- Dental and vision care.
- Medications and insulin.
- Medicare Part B and Part D prescription drug premiums.
- Wheelchairs and walkers.
- Hearing aids.
- X ray.
- Ambulance services.
- Long-term care services for the chronically ill.
- Nursing home expenses.
- Nursing services at home.
But there is more than that. Unlike Flexible Savings Accounts (FSA), HSA funds are carried over into the next year. And unlike IRAs, you are not required to take required minimum distributions (RMDs) when you turn 72. So your money can keep growing until you need it.
Furthermore, you can keep your HSA if you change jobs.
Invest your HSA money
To get the most out of your HSA, you need to make it grow as much as possible. However, many employers offer HSAs that act like basic savings accounts that collect hardly any interest. Today, the average interest rate on a savings account is only 0.13%.
Many employers still offer access to a range of investment options. And if they don’t, you can always open an HSA online through an investment management company.
A self-directed HSA may give you access to a variety of investment options, including low-fee funds, exchange-traded funds (ETFs), and index funds.
These funds generally aim to simulate the return of market indices such as Standard & Poor’s 500, which contains shares of some of the country’s largest companies. The long-term average return for the S&P 500 was 10%.
In any case, you should invest HSA dollars in a diversified portfolio based on your goals and risk tolerance. Several online tools can help you find a suitable asset allocation or investment mix.
Think of Hayel Saeed Anam as a retirement account
Although the HSA is designed to help people pay for eligible health care expenses at any time, it can be really useful in retirement.
As you age, your healthcare needs may become more complex and so can the price. So try to cover your current health care costs with money out of your pocket and don’t touch your health insurance account until you retire. This gives you time to build a large nest to cover eligible tax-deductible healthcare costs.
And once you turn 65, you can withdraw money from your HSA account with no penalty for anything. This money can supplement other retirement needs.
But keep this in mind: Money withdrawn from an HSA for any reason other than qualifying medical expenses is taxable, even if it’s without penalty and even after you turn 65.
If you withdraw money from an HSA for ineligible expenses and are under 65, your withdrawal will face a 20% penalty in addition to ordinary income tax.
Your maximum HSA
If you have an HSA, consider maximizing it if you can. For 2022, you can contribute up to $3,650 for individual coverage and $7,300 for family coverage. For 2023, you can contribute up to $3,850 for individual coverage and $7,750 for family coverage.
You can make an additional compensation contribution of $1,000 if you are at least 50 years old.
So let’s put this into perspective. Let’s say you’re 40, on individual coverage, and you get the maximum HSA each year until you’re 65. Assuming an annual return of 10%, your account will grow to $398,513.
But not everyone can make the most of HSAs every year. So let’s take the same scenario but instead invest $1,200 per year ($100 per month). You will end up with $131,018. Combined with other savings like tax-advantaged retirement accounts and Social Security benefits, this can help support a healthy, comfortable retirement.
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