Can Hsa Be Used For Retirement


You Might Need The Money For Medical Expenses

How HSAs Could Help Your Retirement Savings

One reason not to use your HSA for retirement savings is the possibility that you might wind up needing that money to pay for health care expenses. Odds are good that youll wind up with a big medical bill at some point in your life.

If you have a high-deductible health plan, the out-of-pocket expense could be significant, and unless you have a strong emergency fund in savings, you might need to tap your HSA account to pay the bill.

If your HSA is one of your primary methods of saving for retirement, you might have to dip into your nest egg to cover a medical emergency, which is never ideal.

How Much Could You Receive

Let’s do some simple math to see how handsomely this HSA savings and investment strategy can pay off. Well use something close to a best-case scenario and say that youre currently 21, you make the maximum allowable contribution every year to a self-only plan, and you contribute every year until youre 65. Well assume that you invest all your contributions, automatically reinvest all your returns in the stock market, earning an average annual return of 8%, and that your plan has no fees. By retirement, your HSA would have more than $1.2 million.

What about a more conservative estimate? Suppose youre now 40 years old and you only put in $100 per month until youre 65, earning an average annual return of 3%. Youd still end up with nearly $45,000 by retirement. Try out an online HSA calculator to play with the numbers for your own situation.

How Much Should I Have In Hsa At Retirement

The answer to this question ultimately depends on how much you expect to spend on healthcare in retirement, how much you contribute each year, and how many years you have to contribute money to your plan. Say, for example, that youre 35 years old and making contributions to an HSA for retirement for the first time. You plan to make the full $3,550 contribution allowed for individual coverage for the next 30 years.

Assuming a 5% rate of return and $250 in medical spending each year, youd have just over $230,000 saved in your HSA at age 65. Using an HSA Bank calculator to play around with the numbers can give you a better idea of how much you could have in your HSA for retirement if youre saving consistently.

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What Can I Pay For With An Hsa

As previously mentioned, you can use the money in a health savings account to pay for “qualified” medical expenses whenever you want now, in retirement, or any time in between. Eligible expenses include everything from bandages and hearing aids to psychiatric care, prescriptions, and long-term care.

HSAs can also be used to cover hearing and vision exams, and dental procedures, none of which are covered by traditional Medicare, making HSAs a huge asset to retirees.

Your HSA provider will give you a debit card that can be used to pay for qualified purchases, or you can submit a claim with a receipt for reimbursement. If you wind up using your HSA for a purchase that’s not on the IRS-approved list, you will have to pay income tax on the amount, plus a 10% penalty.

Contribute As Much As You Can

HSA savings can be used for long

If you want to use your HSA for retirement savings, the first thing to do is contribute as much as you can to the account.

Typically, you want to contribute to your 401 until you max out the amount that your employer will match. Getting employer matching contributions is like getting a raise, so its worth getting as much in matching funds as possible.

After that, you can focus on putting money in your HSA until you max it out.

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Save Your Medical Receipts

If youre using your HSA to invest for retirement, you might choose not to use the funds to pay for medical expenses now. But its still important to track medical expenses now because they may help you make tax-free withdrawals from your HSA later.

HSAs have no clock on medical reimbursements, meaning if you have a saved receipt, you can pay yourself back for it even years after the initial expense.

If your child had an emergency room visit years ago, you may reimburse yourself at any time from the HSA, as long as you have the receipt, says Paul Mitchell, CFP and partner of Precision Wealth Partners in Delaware. You can choose to pay all medical bills out of pocket, invest the HSA funds, then reimburse later with the HSA earnings from any tax-favored growth.

Who Can Open An Hsa

To qualify for an HSA, you must have a high-deductible health plan and no other health insurance. You must not yet qualify for Medicare, and you cannot be claimed as a dependent on someone else’s tax return.

A primary concern many consumers have about foregoing a preferred provider organization , health maintenance organization plan, or other health insurance in favor of a high-deductible health plan is that they will not be able to afford their medical expenses.

In 2021, the deductible for an HDHP is at least $1,400 for self-only coverage and $2,800 for family coverage . Depending on your coverage, your annual out-of-pocket expenses could run as high as $7,000 for individual coverageor $14,000 for family coverageunder an HDHP . High expenses can be one reason these plans are more popular among affluent families who will benefit from the tax advantages and can afford the risk.

However, a lower-deductible plan such as a PPO could have high costs because youre paying the extra money regardless of the size of your medical expenses that year. With an HDHP, by contrast, you’re spending more closely matches your actual healthcare needs.

Of course, if you know your healthcare costs are likely to be higha woman who is pregnant, for instance, or someone with a chronic medical conditiona health plan with a high deductible may not be the best choice for you. But keep in mind that HDHPs completely cover some preventive care services before you meet your deductible.

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Reimburse Yourself For Expenses

With an HSA you are not required to take a distribution to reimburse yourself in the same year you incur a particular medical expense. The key limitation is that you cant use an HSA balance to reimburse yourself for medical expenses you incurred before you established the account.

So keep your receipts for all healthcare expenses you pay out of pocket after you establish your HSA. If in your later years, you find yourself with more money in your HSA than you know what to do with, you can use your HSA balance to reimburse yourself for those earlier expenses.

How Can You Enroll In An Hsa

Can HSA be a Retirement Account? Benchmarking HSA against 401K

You must be enrolled in a high-deductible health plan to establish an HSA. The IRS sets certain parameters to determine if a plan can be considered high-deductible.

Here are the 2021 numbers. The minimum deductible is $1,400 for an individual and $2,800 for family coverage. The maximum deductible is $7,000 for an individual and $14,000 for family coverage.

Most people enroll through their employer, but if you have an HDHP, you can also shop on the open market. There are a few other eligibility requirements to keep in mind.

  • You cant contribute to an HSA over 65.

  • You also arent able to contribute if you are enrolled in Medicare.

  • Youre ineligible if youre claimed as a dependent on someone elses tax return.

  • You cant have any other health coverage .

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A Health Savings Account Or Hsa:

  • lets you put away pre-tax money to pay for qualified health expenses,
  • can only be opened while you are working and if you have a high deductible health plan,
  • has current plan limits of $3,650 per year, and
  • includes a yearly catch-up contribution from age 55-65 of $1,000 per year.

Saving for your retirement is like putting together a really complex, expensive puzzle. Just to cover the basic expenses, for example, youll need a retirement income of about $50,000 a year.1

One retirement savings puzzle piece that often gets overlooked? A health savings account . Here are four things to consider when using your HSA for retirement.

How To Use An Hsa For Retirement

Using an HSA for retirement isnt about replacing an IRA or other employer-sponsored retirement benefits, according to Vipond. Instead, its about coordinating your savings in a way that allows you to maximize how you plan retirement with a health savings account.

First of all, you can save money in an HSA for use after retirement. If you plan to work toward maxing out your HSA, you can let the money grow year over year. Unlike a flexible spending account , in which the money doesnt roll over, HSA money continues to grow. Its not a use it or lose it plan.

Because you dont have to use up all the funds each year, you can let remaining funds grow, with the intention of using the HSA in retirement for health care expenses. Your HSA money can be used for certain premium payments and other health care costs.

However, Vipond pointed out, its also possible to strategize when you take out health care money.

Consider using your regular accounts to pay current health care expenses, Vipond said. Save all your receipts until youre in retirement or need the money. Then you can withdraw the money all at once, based on your previous health care spending.

Because you can withdraw money spent on health care without penalty and without paying taxes, this can be one way to help if youre planning to retire early and cant start withdrawing for a traditional IRA or 401 until age 59 ½.

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Hsa Rules To Keep In Mind

Keep in mind that, if you open and plan to use an HSA, there are a few rules to follow:

  • You cant continue to contribute to your HSA after age 65 unless you are still employed and not enrolled in Medicare..
  • If youre over age 55, you can contribute an extra $1,000 to your HSA each year. This can be a huge benefit to boost your medical savings fund as you get closer to retirement.
  • When you enroll in Medicare, youre no longer eligible to contribute to your HSA.
  • If youre claimed as a dependent on someone elses tax return, you arent eligible to contribute to an HSA.
  • How To Use Your Hsa In Retirement

    An HSA Can Help You Save for Retirement

    Once youve retired, you can use your health savings account in quite a few waysincluding some that have nothing to do with health-related expenses.

    Pay your retirement healthcare bills. Medical expenses are big part of retirement costs. At a bare minimum, you may be responsible for Medicare Part A and B premiums, prescriptions and out-of-pocket costs, like deductibles.

    Bridge the gap to Medicare. You can only join Medicare when you turn 65 . If you end up retiring before then, your HSA funds are particularly well suited to covering your healthcare bills, which can include insurance premiums, until you qualify for government support.

    Cover non-medical expenses. After you turn 65, you can start using your HSA for non-healthcare expenses, as the 20% early withdrawal penalty no longer applies. Use it to cover your day-to-day expenses or pay for home renovations. Youll simply owe income taxes on whatever you withdraw.

    Prepare for long-term care expenses. Long-term care is expensive, with a private room in a nursing home potentially costing over $90,000 a year, according to the U.S. Department of Health & Human Services. Because Medicare generally does not cover long-term care, an HSA provides insurance should you need it.

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    Is A Hsa Right For Me

    A Health Savings Account is an excellent tool to not only save for upcoming health-related expenses, but also save for retirement. And regardless of employment status, you can open up a HSA today. However, there are several items to consider before beginning to invest in an HSA.

    First, you must meet these requirements:

    • Must be covered under a qualified high-deductible health plan
    • May not be covered under any health plan that is not a qualified HDHP
    • Must not be enrolled in Medicare
    • May not be claimed as a dependent on another individual’s tax return

    If you meet these requirements, you are eligible to enroll in an HSA. But is the best fit for you?

    Andrew Westlin, senior financial planner at Betterment, suggests that a certain type of consumer is more appropriate for an HSA. “If you are someone that goes to the doctor regularly and/or can’t afford to pay your deductible out of pocket, then a High Deductible Health Plan is not right for you. But if you are healthy, don’t expect to have many medical expenses, and also have a safety net/could meet your deductible with cash on hand, then this type of plan may be a great fit,” he said.

    For myself, I have a HSA through Lively as I have a HDHP and only visit the doctor once per year for preventative care. Each year, I try to meet the IRS maximum contribution for a single-coverage person. And every dollar I put away is invested within a brokerage account with TD Ameritrade.

    Plan To Use Your Hsa In Retirement

    You can always use your HSA to pay for qualied medical expenses like vision and dental care, hearing aids, and nursing services at any time. Once you retire, there are additional ways you can use the money:5

    1. Help bridge to MedicareIf you retired prior to age 65, you may still need health care coverage to help you bridge the gap to Medicare eligibility at 65. Generally, HSAs cannot be used to pay private health insurance premiums, but there are 2 exceptions: paying for health care coverage purchased through an employer-sponsored plan under COBRA, and paying premiums while receiving unemployment compensation. This is true at any age, but may be helpful if you lose your job or decide to stop working before turning 65.

    2. Cover Medicare premiumsYou can use your HSA to pay certain Medicare expenses, including premiums for Part B and Part D prescription-drug coverage, but not supplemental policy premiums. For retirees over age 65 who have employer-sponsored health coverage, an HSA can be used to pay your share of those costs as well.

    3. Long-term care expensesYour HSA can be used to cover part of the cost for a “tax-qualified” long-term care insurance policy. You can do this at any age, but the amount you can use increases as you get older.

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    What Is A Qualifying Medical Expense For An Hsa

    The IRS defines qualifying medical expenses as “the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and for the purpose of affecting any part or function of the body.”

    The IRS doesn’t consider a medical expense to be “qualifying” just because it may generally benefit your health. For example, the IRS specifically states that vacation costs are non-qualifying expenses, even if getting away may be beneficial to your mental or physical health. Qualifying expenses must be “primarily to alleviate or prevent a physical or mental disability or illness.”

    The IRS provides a long list of qualifying expenses in Publication 502 to help you determine if you can use your HSA funds to pay for a particular product or service. You can use your HSA funds to pay qualifying expenses for both yourself and eligible dependents.

    You can generally use HSA funds to pay for medical services offered by practitioners, along with diagnostic devices, supplies, and equipment care providers need to offer their services. Some of the most common HSA-eligible expenses are:

    • Prescription medications
    • Eye care, including contact lenses and glasses
    • Infertility treatments
    • Veterinary care
    • Weight loss programs, unless part of treatment for specific diseases

    How To Use Your Health Savings Account For Retirement Investing

    Utilizing Health Savings Accounts (HSAs) in Retirement Planning

    Saving for retirement is difficult, but its an important part of everyones financial life. There are a number of ways to make saving for retirement easier, such as using tax-advantaged accounts like individual retirement accounts and 401 plans.

    One special type of tax-advantaged account, the health savings account , isnt specifically designed to help people save for their retirement. However, its unique benefits make it one of the most powerful tax-advantaged accounts out there.

    If you have access to an HSA, it can be one of the best ways to set money aside for retirement.

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    The Rules For Hsas Could Change

    Finally, just because HSAs are great for retirement savings now doesnt mean that they will be 20, 30, or 40 years from now. The government could change the rules for how you can use the money in the account. For example, the IRS may add a time limit for withdrawing funds after you incur a medical expense.

    Future changes may make it harder to use the money you have in the account or alter the tax implications, which could limit its usefulness as a retirement savings vehicle.

    Earmark Savings Just For Health Care

    You’ve likely saved for your children’s college expenses in a 529 savings account. It’s a specialized kind of account that lets you save for a specific expense in your future. You may have also earmarked some of your savings for distinct financial goals such as a new car, a special family vacation, or new home. In each case, your investing goal has a different time horizon and should be handled in a different way.

    Now think about health care. You’ll likely face a bevy of health care expenses in your futuremedical procedures, hospital bills, prescription drugs, maybe even home health care or nursing home expenses. No one knows when these expenses will hit, or how much you may have to pay.

    Since you will likely have to pay for large scale health care expenses sometime later in life, building a nest egg specifically designed to help cover future health care costs is a prudent move. But how much should you save?

    According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2021 may need approximately $300,000 saved to cover health care expenses in retirement.

    Even if you don’t have an HSA, it may be prudent to set aside certain assets just to pay for health care. “Health care will likely be one of your top 5 expenses in retirement,” says Steven Feinschreiber, Senior Vice President of Financial Solutions at Fidelity. “So consider earmarking a portion of your 401s or IRAs to help pay for expected health care costs throughout your retirement.”

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