How to Leverage Your HSA for Retirement Impact
By: Chad Gramling
Posted on Friday, September 22, 2017
Health Savings Accounts (HSAs) are rapidly becoming a part of many U.S. consumer retirements plans. Not only do they enjoy triple tax benefits* and allow funds to roll over year-to-year, there is no 20% penalty if funds are used for non-medical related purposes after age 65 (though taxes still apply).
So, how can you best leverage your HSA for retirement? Here are some ideas:
- Contribute at the Max. I know… it’s easier said than done, but contributing as much as possible to your HSA has advantages. First, it reduces your overall taxable income during the years you’re contributing. Second, you are will earn dividends on your deposited funds, so you will want that base to be as high as possible. Maxing out contributions allows you to save for general retirement expenses beyond medical expenses, giving you more access to resources for your general living expenses while in retirement.
- Make Your Contributions by Payroll. As long as you’re eligible (IRS.gov), you can contribute to an HSA. However, if your Health Savings Account contributions are made as a salary reduction arrangement, they’re considered employer contributions. If your employer allows this, it’s considered a section 125 cafeteria plan contribution, meaning contributions aren’t wages and they aren’t subject to employment taxes or withholding. That makes them exempt from Social Security and Medicare taxes.
- Don’t Spend What You Contribute. Yeah… another crazy suggestion, right? HSAs were designed to help people with high deductible health plans gain relief in their out-of-pocket medical expenses. That’s certainly a welcome benefit for many families and consumers with health concerns. However, if you don’t have frequent medical expenses and your budget can swing it otherwise, leave your HSA funds where they are. This way, your deposited funds can keep growing as much as possible before you need them.
- Choose the Right Beneficiary. You’ll be asked to designate a beneficiary to whom your HSA funds should go to if you were to pass away. Choose your spouse so he or she can inherit the balance tax-free as long as the money is kept in the HSA and used for qualified medical expenses. Anyone else you select will be subject to taxation on the fair market value upon their inheriting or it.
- Save Your Receipts – for YEARS. Let’s assume you don’t touch your HSA contributions for many years. That means you’ll be paying for your medical expenses with your other income while accumulating that savings. Keep your receipts. It would be wise to make digital copies too since the physical copies may wear out. At any age, you can reimburse yourself for qualified medical expenses by withdrawing the money from the HSA. However, after you turn 65, you can reimburse yourself without being penalized on the distributions.
It is a good practice to research all your options for retirement savings. Whether it’s investing in HSAs, IRAs, stocks, bonds, mutual funds, or annuities, we have can help you decide which options will work best with your goals. Visit any branch or meet with us in person by scheduling an appointment with a member of our team.
*This material is for informational purposes, and should not be relied on for tax, legal or accounting advice. Please consult your own tax, legal and accounting advisors before engaging in any transaction.