Health Savings Accounts: Tax-Free Retirement Savings

Looking to boost your retirement savings? A health savings account (HSA) could do just that. An effective retirement income plan should include non-taxable income sources—and that’s where a health savings account comes in.

In retirement, each individual can expect to spend about $140,000 on healthcare expenses in retirement: you could spend even more depending upon the length of your retirement. Health Savings Accounts were introduced in 2003 and have been used sparingly. The rising cost of health-care expenses has led to more Americans qualifying for a Health Savings Account.

These accounts allow an individual or couple with healthcare deductibles of $1,300 or $2,600 respectively to save and invest completely tax-free. Money contributed is tax-deductible and withdrawals used for health-care expenses are tax-free. Here’s how to leverage the benefits of these accounts.  

HSAs and Retirement: What You Need to Know

How HSAs work

It’s critical for you to understand the options your HSA provider is offering because they vary widely. You can be approved for an HSA if your health plan is HSA qualified and your minimum deductible is $1,300 for an individual or $2,600 for a family plan.

Maximum Annual Contributions: $3,400/individual and $6,750/family. If you’re over age 55, you can contribute an extra $1,000.

Maximum out-of-pocket limit: $6,550 and $13,100/family

Penalties: 20% plus income tax if withdrawing money before age 65 for non-medical expenses, no penalty after age 65, but still taxable for non-medical expenses

Covered expenses include: Premiums for Medicare Part B, C & D, long-term care premiums, coinsurance and copayments, dental work and vision care (not covered by Medicare), fertility treatments, some education for special-needs children, and some home renovations to accommodate a disability.

Remember these four tips regarding HSAs and your retirement:

Know what you’re getting—there are so many different options when it comes to selecting your HSA. Understand your options to make sure you pick the right one for you!

Check your costs—always ask to see a list of fees of charges when shopping for the right HSA account. You could be charged a monthly fee, transaction fee or check-writing fee, among other fees.  

Understand the rules—rules and restrictions vary from traditional plans, make sure you always stay in the know.

Take the reigns—ultimately you are the owner of your HSA account, so you are in control.  

(Source for this information is the Internal Revenue Service.)

Define Your Retirement: Use this helpful checklist to achieve the retirement you deserve.

Extra features

When opening an HSA, any medical expense incurred and paid out of cash or from another account can be reimbursed during retirement as tax-free income. This is especially important to avoid hitting the Medicare Surcharge in retirement: this happens if your adjusted gross income (plus tax-exempt interest) is higher than $85,000 if you’re single or $170,000 if you’re married filing jointly.

Tax Advantage Example

HSAs, if used properly, have more tax advantages than other retirement savings options. According to Schwab Center for Financial Research:
If you contribute the maximum $6,750 to an HSA for 15 years, compared to the same contributions into a 401k, the HSA account will grow to roughly $166,450 compared with $124,905 in the 401k.

A health savings account is an excellent way to save and invest without paying taxes and, if used correctly, HSAs have the potential to boost your income during retirement.

Take control of your retirement

Still confused about how to boost your retirement savings with HSAs? I’m here to help. I am a Chartered Retirement Planning Counselor. This means I have studied rigorously to ensure I can prepare you for your ideal future, regardless of your age. Let’s meet to plan your happy retirement together.