If You Withdraw Early You Could Incur A Penalty
You can withdraw funds tax-free at any time for qualified medical expenses, but if you use the funds for non-healthcare expenses before age 65, you’ll owe a 20 percent penalty.
After age 65, you can make withdrawals to cover non-medical expenses. As with an IRA, the money will be taxed as income.
Using A Health Savings Account As A Retirement Vehicle
Published: by Financial Samurai
You may not realize this, but a health savings account can be used as a retirement vehicle. If youve maxed out your 401 and IRA contributions, maxing out an HSA could be another source of retirement funds.
A health savings account offers triple tax savings because you contribute pre-tax dollars, pay no taxes on earnings, and withdraw the money tax-free now or in retirement to pay for qualified medical expenses.
Given the vast majority of us will incur qualified medical expenses as we age, contributing to an HSA to address these expenses is a good idea.
You can use your HSA to pay for eligible health care, dental, and vision expenses for yourself, your spouse, or eligible dependents . Qualified medical expenses encompass almost everything you can think of as well.
You can even use the money for nonmedical expenses after age 65, such as buying a Lamborghini. However, be aware this expense will be adjudicated as nonmedical and taxed as ordinary income. Further, be aware if you are under age 65, there is a 20% penalty on nonmedical withdrawals in addition to the tax.
What Happens To An Hsa When You Retire
An HSA doesnt go away when you retire instead, the money remains available to you until you need to use it. As long as withdrawals pay for qualified medical expenses, youll pay no taxes or penalties on the withdrawals. And your invested contributions can continue to grow as long as they remain in the account.
One advantage of using an HSA for retirement versus an IRA or 401 is that there are no required minimum distributions. In other words, you wont be penalized for leaving money in your HSA. Though there is a 20% penalty for using the money for non-medical expenses before age 65.
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Hsa Rules For Withdrawals
If you withdraw money from an HSA for any reason other than to cover eligible medical expenses, you will be subject to a 20% penalty on the amount withdrawn unless you are age 65 or older. This 20% penalty is double the 10% penalty that applies to early 401 or individual retirement account withdrawals. Money withdrawn from an HSA not used for qualifying medical or dental expenses is taxed as ordinary income, regardless of whether you incur the penalty.
Unlike with flexible spending accounts, you do not have to spend money in an HSA in the same year you make the contribution. You also are not subject to the rules for required minimum distributions that apply to other types of pre-tax retirement savings accounts such as 401s and traditional IRAs.
Invest Your Contributions Wisely
The key to maximizing your unspent contributions, of course, is to invest them wisely. Your investment strategy should be similar to the one youre using for your other retirement assets, such as a 401 plan or an IRA. When deciding how to invest your HSA assets, make sure to consider your portfolio as a whole so your overall diversification strategy and risk profile are where you want them to be.
Your employer might make it easy for you to open an HSA with a particular administrator, but the choice of where to put your money is yours. An HSA is not as restrictive as a 401 its more like an IRA. Since some administrators only let you put your money in a savings account, where youll barely earn any interest, make sure to shop around for a plan with high-quality, low-cost investment options, such as Vanguard or Fidelity funds.
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Maximize Your Hsa Assets
Here are some options for using your accumulated HSA contributions and investment returns in retirement. Remember, distributions for qualified medical expenses are not taxable, so you want to use the money exclusively for those expenses if possible. There are no required minimum distributions, so you can keep the money invested until you need it.
If you do need to use the distributions for another purpose, they will be taxable. However, after age 65, you wont owe the 20% penalty. Using HSA assets for purposes other than qualified medical expenses is generally less detrimental to your finances once youve reached retirement age because you may be in a lower tax bracket if youve stopped working, reduced your hours, or changed jobs.
In this way, an HSA is effectively the same as a 401 or any other retirement account, with one key difference: There is no requirement to begin withdrawing the money at age 72. So you dont have to worry about saving too much in your HSA and not being able to use it all effectively.
Spending Your Hsa Savings In Retirement
The rules on spending your money can get complicated. Always ask a tax professional for guidance before you make decisions . That said, here are some ideas to discuss with your CPA:
A family affair: HSA assets can cover qualified expenses for you, your spouse, and dependents you claim on your tax return. That may help to convince you that youll have no problem spending that money in retirement.
Qualified expenses: To receive tax-free distributions from an HSA, you need to spend money on qualified medical expenses defined by the IRS. That category contains numerous items, including Medicare premiums as well as other costs mentioned above. For complete details, visit IRS.gov.
Saving receipts: You dont necessarily have to take a withdrawal from your account and reimburse yourself in the same year you face expenses. You can even wait until retirement to tap your HSA and justify those distributions with qualified expenses that you paid in previous years. Waiting for more than a short time can cause problems , but some people like that strategy. No matter how you spend, its essential to keep accurate records of your qualified expenses.
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What Is An Hsa
Health Savings Accounts exist to help Americans with high-deductible health plans pay for medical expenses. High-deductible medical plans are very common these days and make it difficult for some Americans to pay their medical bills alongside health insurance premiums.
HSAs are nice because they allow you to set money aside to cover any unexpected medical bills. High-deductible medical plans can save you money upfront because you can pay a lower premium, but think of HSAs as an emergency fund for your medical expenses and a nice hack to help you invest as well.
With an HSA, you can currently contribute up to $3,400 annually if youre single and $6,750 if you have a family medical plan. If youre 55 or older, you can contribute an additional $1,000 each year.
Unfortunately, not everyone qualifies to contribute to an HSA. For starters, you must have a high-deductible plan through your employer. If the option to contribute to an HSA arises, be sure to take it. Heres why.
Sometimes employers, match contributions, which is easy money to take advantage of. If you switch employers or change medical plans, you wont lose the funds you deposit. Plus, you dont have to use the funds you contribute each year.
Also, HSA funds can be used to pay for qualifying medical expenses tax-free. Qualified medical expenses include: surgery, x-rays, dental care, etc. Theres a long list, but you can view all qualifying medical expenses by checking out IRS Publication 502.
Who Can Have An Hsa
HSAs aren’t on the table for everyone. They’re available only through high deductible health plans , a type of health insurance plan with low monthly premiums and high out-of-pocket costs.
To contribute to an HSA in 2020, you must belong to a health insurance plan with a deductible of at least $1,400 if you’re single, or $2,800 if your plan covers two or more people. If you or anyone in your family has chronic medical problems, or you consistently find yourself in the doctor’s office, a HDHP may not be right for you.
HDHPs, and thus HSAs, are ideal for young or healthy people who don’t anticipate needing to spend a lot on healthcare in the near future. If you need to switch to a different health plan later, fear not: the money in your HSA will stay with you forever.
If you’re interested in an HSA but you get health insurance through your employer, you can open an HSA whether the company offers one or not, as long as HDHP is your only coverage, you aren’t enrolled in Medicare, and you aren’t being claimed by anyone as a dependent. The IRS website has all the details on eligibility.
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How To Use Your Health Savings Account For Retirement Investing
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.
Concerns About Having A High Deductible Health Plan
One of the biggest concerns with an HSA is having a high deductible health plan . It can be a scary change from traditional HMO health plans, and honestly, a lot of the language in most employer open enrollment packages makes it super hard to understand what you will really pay.
After having a HDHP for a while, and having a few medical bills to go along with it, I wanted to alleviate some concerns about having a HDHP, because I’ve found it to not be scary at all, and in many cases, it’s been cheaper than my old insurance coverage AT MY SAME EMPLOYER.
It’s important to remember that a HDHP is still insurance. And with insurance, you get a lot of coverage already. For example, most HDHPs include 100% coverage for wellness visits, vaccinations, and more. And many services are covered at 80% – sick visits, x-rays, surgery, etc. And many plans still offer decent prescription drug coverage, with $4 generics, etc.
If you want to compare your options that include an HSA, check out Policy Genius for a quick and easy quote.
My Story
You may think that 80% coverage number is scary, but you also have to realize that you’re going to pay 80% of the insurance negotiated price with the hospital – which is usually pretty cheap. For example, I recently had to get a CT scan. The hospital billed my insurance $2,100. But I only had to pay $370.16 – or 17%. And when the time comes, I can always submit that $370 bill to get reimbursed from my HSA.
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Make A Separate Savings Plan For Health Expenses
If you decided that you want to use your health savings account for retirement, the next step is to figure out how youre going to pay for health care costs now .
The best way to do this is to save money in a sinking fund each month. A sinking fund is setting money aside for large or irregular purchases ahead of time, so they dont bust your budget.
You can open a separate savings account earmarked for medical expenses, contribute a certain amount monthly, and then pull the money out of savings when you need it.
Of course, you should also have an emergency fund, in case of a medical emergency. The sinking fund is simply a way to manage smaller costs .
If something major happens and you dont have enough money in your medical sinking fund, then I would pull from the emergency fund.
If your emergency fund doesnt cover the full amount, then you can pull from the HSA.
Think of your medical sinking fund and emergency fund as an insurance policy to not touch your HSA!.
The Medical Retirement Account
To get the most use from the benefits of an HSA, it is best viewed as a long-term investment vehicle to help with future medical costs in retirement. It can be a missed opportunity not to approach it as such. This includes maximizing and investing contributions for growth, paying current medical costs out of pocket and saving the receipts so that you have the option to withdraw funds if lifes curveballs lead to some temporary hard times.
Positioning the HSA as a medical retirement plan will provide you with an important tool for navigating health care costs in retirement, which we all will have to some degree. As already mentioned, one of these is Medicare premiums. In fact, Fidelity estimates that the average couple will need $300,000 in todays dollars for medical expenses in retirement. The HSA can be there, supplying tax-free withdrawals for these costs.
Summing it up, with all the benefits that come with a HSA, it can be a great option for medical expenses in retirement. Considering that you must be on a high-deductible health insurance plan to be eligible for an HSA and that such a plan may not always best fit your health situation, it is important to take advantage of the HSA when you can. In return, you receive triple tax benefits, flexibility to access it for qualified medical expenses without penalty before retirement, and, as a worst-case scenario after age 65 it becomes, for all intents and purposes, an IRA with no required minimum distributions.
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Health Care In Retirement: Whats Your Plan
Health care remains one of the biggest expenses youll need to plan for in retirement. With inflating health care costs, increased expenses as you age and the unpredictable nature of health itself, the only certainty in saving for retirement is that its a good idea to start now. And your Health Savings Account could be an important part of that plan.
Many people use their HSA like a Flexible Spending Account and spend most of what they contribute each year, but this misses an important benefit of an HSAone that may be the key to your future health care security. Whats different about an HSA is that your account balance rolls over from year to year and can be invested to help you build your account for the future.
How To Use An Hsa To Aid Your Retirement
Keep in mind, you dont have to use funds during the year you acquire them. If you choose not to use them on medical expenses for the year, your contributions will just roll over.
The great thing about using HSA funds during your retirement is that you can use them to cover medical expenses. Medical expenses are unpredictable, especially during retirement. So have a savings stash lined up to cover your medical costs can offer some financial relief as you get older and retire.
If you dont want to use your HSA funds for medical expenses, once you reach the age of 65 or become eligible for Medicare, you can withdraw them for any purpose penalty-free.
What if you want to access your funds earlier than that? This article is all about understanding how HSAs work and how to use one to aid your early retirement.
If youre on track to reach early retirement and want to withdraw HSA funds early for any purpose and have the withdrawal be penalty free, you can reimburse yourself for qualified medical expenses youve already paid.
According to HSABank.com, as long as the IRS-qualified medical expenses were incurred after your HSA was established, you can reimburse yourself with HSA funds at any time.
Lets say you open up an HSA through your employer-medical plan and contribute the maximum each year. Meanwhile, you pay any medical bills you obtain in cash and keep contributing to your HSA and investing the funds.
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Can Hsa Be Used For Retirement
HSAs are not specifically designed to be a retirement planning vehicle, but you can use an HSA for retirement, since the money accumulates in your account until you withdraw it tax-free for qualified medical expenses. You could also use your HSA funds to pay for other retirement expenses after age 65youll just have to pay income tax on those withdrawals.
Fees And Investment Options Matter
If you’re using an HSA to save for retirement, fees and investment options matter, so you’ll want to shop around. “HSAs should be treated no differently from other retirement funds in terms of investing,” certified financial planner Rose Swanger told CNBC’s Tom Anderson.
Since your HSA is not tied to your employer like a 401, you can choose whatever provider you want. When shopping around, pay attention to account fees and note that some accounts will require a minimum balance.
HSASearch lets you compare more than 400 providers.
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Consider These Reasons For Saving:
- When you use HSA funds for qualified medical expenses, you dont pay taxes. The money you contribute to your account, any earnings and any withdrawals for qualified expenses — all are tax-free. These tax advantages can make for compelling reasons to save in your HSA.
- Think about your health care costs in retirement. These could be anywhere from $144,000 to $163,000 to pay for your health care if you are single, and about $301,000 if you are married.1 The sooner you start saving in your HSA, and emphasizing saving over spending, chance are the more you’ll have to cover your medical needs in retirement.
- Your HSA can be an investment tool. An HSA parked solely in cash to cover short term needs will only keep you focused on the here and now. By putting your HSA dollars to work by investing them, youll have a chance to grow your account over the long term. And dont worry, if you ever need money for current medical expenses, your HSA funds are always accessible
- You can take it with you. If you change jobs or retire, your HSA moves with you.
