It’s no secret that Clark is a fan of HSA’s, or Health Savings Accounts. Although they’re not for everybody, HSAs can allow you to save money for health care expenses pre-tax. Then the money earns interest tax free either as an investment or as simple savings account and then you can spend it for those deductibles and other medical expenses tax free. In other words, an HSA is triple tax advantaged!
But did you know you can utilize HSA’s for retirement savings also?
Read more: Clark’s investment guide
Save for healthcare and retirement at the same time
If you have a high-deductible health plan with an HSA and you’re healthy, then it is absolutely to your benefit to use it.
One of the great things about an HSA versus an FSA (Flexible Spending Account) is that with an HSA, the money rolls over every year, while with the FSA, you lose the money you’ve put in if you don’t use it by the year’s end. You can contribute a maximum of $3,350 individually or $6,750 as a family, (2016) and if you’re over 55 you can contribute $1,000 more with an HSA every year.
And if you invest them well, they could earn a significant sum of money through your HSA!
But say years down the road, you’ve been contributing to the HSA and you have a lot of money in the bank, much more than you think you’d need for your medical expenses. After age 65, you can use this money like you would a traditional IRA — meaning you’d be able to use it for expenses other than medical expenses in retirement!
However, there is one catch.
Using an HSA for expenses in retirement
Though you can use your HSA money for expenses other than medical expenses, it does come with a slight caveat.
If you used the money in your HSA before turning 65 for non-qualified expenses (non-medical expenses) you’d be subject to a 20% penalty, and you’d also owe tax on the money. But, if you use the money for non-medical expenses after age 65, there is no 20% penalty. Also, if you are retired by 65 or are working less, your income is likely to be much lower, allowing you to pay less tax on the money you’d withdraw.
Another benefit is that you don’t have to begin using the money from your HSA at a certain age like you do other retirement accounts.
How much could it grow?
Investopedia has a great example of this idea in practice. Say someone who started at age 21 with an HSA is contributing the maximum amount allowed each year and earns an average annual return of 8%. By the time this person retires, he would have $1.2 million saved, tax-free!
Though this is a best-case scenario, HSAs can be a great way of saving for the future tax-free. To see how much you could potentially save using an HSA, check out this HSA calculator.
Other expenses HSAs can be used for in retirement
Another thing to consider with HSAs is the other kinds of expenses we might have in retirement, such as long term care insurance, in-home nursing care, hearing aids, retirement community or nursing home care fees, in addition to regular medical expenses such as eye exams, glasses, teeth cleaning, or prescriptions. If you needed to make modifications to your home to make it more accessible, HSAs can be used for these kinds of expenses tax-free as well.
One caution about HSAs
Though you’re shielded from taxes by using an HSA, you’ll want to keep in mind the high deductibles of these plans. Some people may pay out-of-pocket medical expenses as high as $6,550 for individuals and $13,100 for families in a year with the high deductible health plans that have HSAs, according to Investopedia. But, some argue is it worth it once you consider the cost of higher premiums, which could be as much as $2,000 more. Basically with HSA plans, your expenses more closely match your healthcare needs.
It is important to note that although HSAs are tax-free at the federal level, some states do tax contributions to HSA accounts. It’s best to speak with a tax professional to understand how an HSA would work best with your unique situation.
Read more: Clark’s Health Savings Account guide