How and HSA Can Help You Before and After Retirement

• Author: Kelly Cooke
• Posted: 2024-10-01

One overlooked option that may help you as a retirement vehicle is a Health Savings Account (HSA). People often confuse this with a Flexible Savings Account. However, the HSA can actually use tax advantages to help you build wealth over the years. You will likely need to use the money at some point in your life. If you do not end up using all of your HSA, it can become part of your estate plan. While you may not have heard of an HSA, it is something that you should start today, even if you are far from retirement.

An HSA is a savings account that is available for anyone who has a high-deductible health insurance plan. A high deductible is defined as over $1,350 for an individual and $2,700 for a family. This covers most of the health insurance plans in this county. With these plans, you will need to foot some of your medical expenses before your insurance kicks in to cover it. The thought behind an HSA is that the tax laws can help you save so you are in a better position to pay for your medical expenses.

There Are Tax Advantages to This Type of Savings Account

The money for your HSA contribution will come from pre-tax dollars. In this way, it is just like your IRA or 401(k). Instead of sitting in an account waiting to be used, you would invest the money in your HSA so it can grow over time. You may even have broader investment options in an HSA than you would in your 401(k). If you do not use all the money at the end of the year, you do not forfeit it like you would in a Flexible Spending Account. The money is yours permanently, and it stays in the account until it is used. This account would last for the rest of your life.

The HSA can be used on qualifying medical expenses. This would certainly include co-pays, drug expenses and uncovered medical bills. Your HSA can also be used as a long-term care account. You can save over time for nursing home care if you do not want to get a long-term care plan. It can even include home health care expenses as you get older.

The great thing about an HSA is that your withdrawals from it are completely tax-free. When you take out from a 401(k), you need to pay deferred taxes on the income. All of your withdrawal counts as deferred income. In addition, you would need to take required minimum distributions when you turn 72. There is no such requirement with an HSA.

Moreover, an HSA can even build wealth for future generations. First, if you passed away with money still in your HSA, it would go to your spouse and become their HSA. If you have no spouse, the money would pass to your beneficiary. They could use it for a year to pay your medical expenses after you passed. If there is still money left, it would be treated like a 401(k). In other words, they would get the money, and it would be subject to deferred income taxes.

This Can Be an Alternative or a Complement to Your 401(k)

We cannot stress enough how helpful of a vehicle an HSA is. If you are already maxing out your 401(k) contributions, it is a way to increase your tax-advantaged savings. At the same time, you can buy individual stocks with your HSA so you can invest more broadly.

It Will Pay Your Medical Expenses

You will have medical expenses later on in life. It is a fact, especially since Medicare does not provide full coverage for recipients. There will be co-pays and bills for hospital stays. Medical expenses eat up at least 15% of your annual income as a retiree. With an HSA, you would not need to use valuable cash resources, and you could maintain your liquidity. There is little risk to you to start this account. Even if you are only starting with a small contribution from each paycheck, it gets you started on a healthy financial track. You may even be able to avoid having to put your assets into a trust when you get older to shield them from nursing homes. You do not even need to be retired to enjoy the benefits of an HSA.