How an HSA Can Help Your Retirement Plan Reduce Taxes

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If you are looking for an additional way to save for retirement and get some excellent tax breaks, consider getting a health savings account (HSA). These accounts also enable you to save money on your medical bills.

Medical bills in retirement can be very expensive. Fidelity reveals that the average medical expenses for a couple after turning 65 are as much as $315,000, or $157,500 for a single person. Living longer than average may increase your medical costs.

Long-term care, if it is needed, is very expensive. WorldPopulationReview, which gives the cost for each state, says that the per-month cost of private care in 2024 ranges from $5,900 in Missouri to $36,000 in Alaska.

If you must also pay tax on the money you will use for medical bills, your ability to afford that much could be significantly reduced. An HSA lets you put money into it pretax, and you can withdraw it without paying taxes when used for qualified medical expenses.

The Difference Between an HSA and an FSA

An HSA has one excellent feature that differs from a flexible spending account (FSA). With an FSA, all money put into the account must be used by the end of the year. All unused money disappears, and you can no longer use it. The money you put into an HSA stays in the account, allowing it to grow.

An HSA Has Higher Deductibles

Another difference is that you must have a high-deductible health insurance policy (HDHP) to get an HSA. For an individual, the policy must have a minimum deductible of $1,600, and a family needs a minimum deductible of $3,200.

Even though your deductibles are higher, your premiums will be lower than for traditional health insurance. This combination can result in more savings for you and your family—especially if you are in good health.

Contribution Limits

The contribution limits are lower than for an IRA or a 401(k), but you and your employer can contribute to the account. Bankrate says that singles can contribute as much as $4,150 in 2024, and families can put up to $8,300 into the account. People over 55 can add another $1,000 per year. After you enroll in Medicare, you can no longer make contributions.

Your contributions to the account are tax-deductible. To retain this benefit, you must keep your HDHP or lose the ability to make further contributions.

Interest rates for a health savings account are typically low. You should shop around different banks and credit unions if you are going to get your own HSA health insurance. The primary advantage of an HSA is the tax advantages you have on medical expenses.

An HSA Comes With Investments

HSAs come with the ability to make investments, just like other retirement plans. If you do not like the investment choices in your employer’s plan or the account does not allow investments, you can purchase your own—if you have an HDHP. If your employer contributes to your HSA, keep it to take advantage of the free money and the interest it will bring.

Two Ways to Use an HSA

Depending on how you intend to use the HSA will determine the best way to use it. Here are two options.

• Option #1: If you want to use it to build a larger retirement fund, then contribute the maximum amount each year. Pay for your medical expenses out of your pocket or from other accounts, and let the money grow until you need it in retirement.

• Option #2: Use it to pay for your medical costs as needed. It might significantly reduce your savings but lets you save a considerable amount of money because of the no-tax element on your withdrawals for qualified medical expenses.

Getting repayment for medical expenses can be done any time for HSA-eligible items—even years later. You will need receipts for each expense, but there is no time limit on when you can be reimbursed. Leaving as much money as possible in the account for as long as possible will enable you to get more interest and a larger retirement fund.

Use the Money to Pay for Medicare

Although you cannot use the money directly to pay for Medicare through automatic deductions, you can get reimbursed for the cost. Your payments are tax-free and will enable you to have more money during retirement.

Non-Medical Withdrawals

Withdrawals for purposes other than medical expenses before you turn 65 are not only taxable, but the Fool says you will also have to pay a 20 percent penalty on it. After you turn 65, there is no penalty, and you can use the money for anything, but you will pay taxes on it.

When you are looking to buy a health plan (HDHP) to get an HSA, HealthInsurance says you can get one through MarketPlace or private insurers. Not every HDHP will let you get an HSA account.

An HSA Passes to Your Spouse Upon Death

When you die, the HSA passes to your spouse. They can use it the same way you would, and if they are 65 or older, they will let your spouse make withdrawals without a penalty. When it passes to your spouse, there is no time limit on how soon the money must be withdrawn.

Health savings accounts offer more tax breaks than many other retirement accounts. It would be wise to make them part of your retirement plans because it will enable you to reduce taxes and keep more money in your pocket. Talk to a financial advisor to learn more.

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