When planning for retirement, many individuals tend to focus on traditional retirement accounts such as 401(k)s and IRAs. While these accounts can play a pivotal role in building a secure retirement nest egg, another retirement savings vehicle often goes overlooked: the Health Savings Account (HSA). An HSA can be a powerful addition to your financial plan, offering tax advantages and the potential to manage healthcare expenses more efficiently in your retirement years.

An HSA is a tax-advantaged savings account designed to help individuals and families with high-deductible health insurance plans save money for medical expenses. Unlike Flexible Spending Accounts (FSAs), HSAs are not “use it or lose it” accounts. This means that any unused funds in your HSA can be carried over from year to year, allowing your savings to grow over time.

Triple Tax Advantage

Tax-deductible contributions: Contributions made to an HSA through payroll tax deductions are made on a pre-tax basis and can reduce your taxable income.

Tax-free growth: The money in your HSA can be invested, and any interest or earnings generated from those investments can grow tax-free. Over time, this compounded growth can boost your retirement savings.

Tax-free withdrawals: When you employ your HSA funds for eligible medical expenses, you won’t pay taxes on the withdrawals.

Long-term Growth Potential

While HSAs are designed to cover medical expenses, they can also serve as an additional retirement savings vehicle. Many HSAs offer various investment options that can potentially yield long-term growth. To balance near-term medical needs and planning for the future, consider setting aside a portion of your HSA funds in cash while investing the remainder for potential tax-free growth.

Remember that you can use your HSA funds tax-free for qualified medical expenses at any age. After you turn age 65, you can also use your HSA money for non-qualified expenses. While ordinary income tax would apply to those distributions, the 20% penalty would not be imposed.

Managing Healthcare Costs

As healthcare costs continue to rise, planning for medical expenses in retirement is imperative. Beyond covering day-to-day medical expenses, using your HSA funds to pay for some Medicare expenses may be possible, including your Medicare Part A, Part B, Part D, and Medicare Advantage plan premiums, deductibles, copays, and coinsurance. This can further reduce your out-of-pocket expenses in retirement. It’s important to note that your HSA funds can’t be used to pay for Medigap premiums.

No Required Minimum Distributions

Unlike traditional retirement accounts like 401(k)s and IRAs, HSAs aren’t subject to required minimum distributions (RMDs). This means you can let your HSA funds continue to grow tax-free for as long as you desire, potentially creating a significant cushion for covering future healthcare expenses – especially in retirement.

Contribute the Maximum Amount

Contribute the maximum allowable amount to your HSA each year. For 2023, the limit for individuals is $3,750, and for families, it’s $7,500. If you’re 55 or older, you can make an additional “catch-up” contribution of $1,000.

Keep in mind when you reach age 65 and enroll in Medicare, you are no longer eligible to make contributions to an HSA. However, if you remain working beyond age 65, you may have the option to defer Medicare coverage and stay on a high-deductible health plan, allowing for contributions after age 65.

Invest Wisely

If you’re planning on saving your HSA funds for the long term, investing can be a wise move. The power of compounded growth from investing can help your contributions grow over time and build a retirement nest egg. Before choosing to invest, however, you should consider your risk tolerance and investment horizon.

Save Receipts

You don’t have to use your HSA funds for medical expenses immediately. Instead, you can pay for medical expenses out of pocket and save the receipts. This allows your HSA balance to grow while preserving the option to withdraw funds tax-free in the future by reimbursing yourself for past medical expenses.

Naming a Beneficiary

If you pass away without spending down your HSA and your spouse is named as the beneficiary, your spouse can inherit the HSA along with its tax benefits. However, if a non-spousal beneficiary is chosen, the HSA must be distributed and becomes taxable to them in the year you pass away. Keep this in mind when creating an estate plan and naming a beneficiary for your HSA.

Incorporating an HSA into your financial plan can help enhance your financial security in retirement. HSAs offer a unique combination of tax advantages, investment opportunities, and flexibility in managing healthcare costs, making them an attractive addition to your retirement portfolio. If you’re covered by a high-deductible health plan and eligible to open an HSA, your Aldrich Wealth advisor can help you craft a customized HSA strategy that aligns seamlessly with your unique financial objectives.