If your retirement plan doesn’t include a healthy allocation for HSA contributions, making a few changes now yields important results down the road. What are the benefits of Using your HSA for retirement?
What Is an HSA?
An HSA, or health savings account, is an optional account available through your employer. Your HSA contributions use pre-tax dollars, so they offset your current taxable income. These funds can be used for all allowed medical expenses. These include paying for an ER visit, prescription and non-prescription medications, co-pays, lab tests, some personal hygiene items and other expenses.
Some employers match HSA contributions. As a result, you may be leaving money on the table by not contributing.
How Much Should You Contribute to Your HSA for Retirement?
To maximize the immediate benefits of your HSA for retirement, you should consider two factors.
- Your annual healthcare expenses
- Employer-matching contributions
While your HSA contributions may be just enough to cover your annual medical expenses today, there are reasons to save more than necessary. Consider these points:
- Some health savings accounts have investment options, making them equivalent to a retirement account.
- Medical expenses tend to increase over a person’s lifetime.
- In retirement, your HSA funds don’t have to be used exclusively on medical expenses.
Using Your HSA for Retirement
If you pull out HSA funds for non-allowed expenses prior to the age of 65, expect a penalty assessment of 20%. After you turn 65, though, the penalty doesn’t apply. This means that you can access that money for any desired purpose down the road.
This is money that you could plan to cover future medical expenses, assisted living and other special care. However, HSA funds aren’t limited exclusively to medical and health expenses after the age of 65. This might mean funding your relocation to a more affordable city or buying that RV you’ve been dreaming about.
If you keep the money in the account until after retirement, it can serve as a nest egg or provide an additional stream of income in retirement.
Planning for Medical Expenses in Retirement
According to Bank of America, studies indicate that a couple that retires today at the average age of 65 will pay $296,000 over the remainder of their lives on out-of-pocket medical expenses. Should you shoot for this amount in your HSA account, or do you need more?
While contributions to your HSA today should be prioritized, ensure that the amount is sustainable and comfortable. Keep in mind that you will pay a 20% penalty on non-allowed withdrawals until you are 65 years old.
If you can afford to contribute a larger sum of money, it makes sense to in many situations. After you hit your allowed annual contributions to retirement accounts, your HSA provides you with an additional way to save pre-tax dollars. If your HSA has investment options, you can take advantage of the asset growth opportunity.
If your HSA doesn’t come with investment options, carefully analyze your situation. Are there other investment options available that could yield a greater return? Your financial planner can help you find the answer to this important question.
An HSA specifically covers healthcare expenses prior to age 65 and unrestricted expenses after age 65. If you aren’t planning for these expenses now and in retirement with HSA contributions, how are you preparing for them?