How a Health Savings Account (HSA) can benefit your retirement plan

Consider maximizing contributions to a Health Savings Account (HSA) for tax-efficient investing into retirement.

You may have discovered the immediate benefits of a Health Savings Account (HSA) as a tax-advantaged way to set money aside for current out-of-pocket health expenses. But are you aware that money you save can be used to cover a wide range of medical expenses, including insurance premiums, in retirement?

Here’s what you need to know about HSAs.

What is a Health Savings Account (HSA)?

An HSA is a tax-advantaged account used to pay for qualified medical expenses. In order to participate in an HSA, you must be enrolled in a high-deductible health plan (HDHP). This can either be through an employer-offered plan or by purchasing an individual policy. 

HSA contribution limits 2024

The HSA contribution limit in 2024 is $4,150 for individuals and $8,300 for families. The HSA-eligible health plan must have a deductible of at least $1,600 and an out-of-pocket maximum of $8,050 to qualify for HSA participation. For family coverage, the plan must have a deductible of at least $3,200 and an out-of-pocket maximum of $16,100 to qualify.

If you’re 55 and over, you can contribute an extra $1,000 per year to your HSA.

Once you enroll in Medicare, you’re no longer able to make contributions. However, you can still withdraw HSA funds tax-free. Those funds can be used for a variety of medical expenses, including payment of Medicare premiums. 

HSA benefits

HSAs are unique in that they’re triple-tax-advantaged. This means:

• You contribute pre-tax or tax-deductible funds.
• Earnings grow tax-free as long as they remain in the account.
• Withdrawals are not taxed if they are used to pay for qualified medical expenses.*
   

HSAs also offer significant flexibility in how the money is used and when. This can become particularly valuable in retirement.

• Savings in an HSA can continue to be held indefinitely, as unspent dollars carry over from year-to-year, even into retirement.
• Your HSA stays with you if you change jobs, retire or are no longer covered by a high-deductible health plan.
• After age 65, funds in an HSA can be used for non-medical reasons without incurring a penalty. However, you’ll be taxed on any distributions not used to cover the costs of qualified medical expenses.
   

*Prior to reaching age 65 or becoming disabled, if any distributions are taken for anything other than qualified medical expenses, the distribution is taxed as ordinary income and there is an additional 20% penalty tax.

Investing HSA funds

Like a 401(k) or IRA, you can invest HSA dollars once you’ve reached a minimum balance threshold. This gives you the opportunity to grow your savings over time.

While you typically need to set aside a certain amount for healthcare expenses each year, the remaining amount can be invested (specific rules may vary by provider). Your HSA provider may also offer a few different investment options. 

Your HSA investment strategy should work in conjunction with your overall investment strategy, including retirement accounts and other investment accounts. Consider working with a financial professional to determine the most appropriate investment strategy for you.

HSAs as a retirement planning tool

It’s estimated that the average couple turning age 65 today will need roughly $315,000 over the course of their retirement to cover healthcare expenses. That includes everything from insurance premiums to co-pays and deductibles to prescription drug costs and other expenses.1

HSAs offer critical benefits that can help address this reality:

• Their unique tax advantages help you leverage your available dollars more effectively so you accumulate additional sums that can be targeted to meet medical costs in retirement.
• HSA assets can be used to pay Medicare and other related insurance premiums as well as out-of-pocket expenses.
• Services often not covered by Medicare, such as hearing aids, eyeglasses and dental care, can be paid for using HSA dollars.
• HSA distributions can also be applied toward long-term care insurance premiums and expenses.

If you’re still working for a company with more than 20 employees after age 65 and relying on the company’s provided insurance coverage and not Medicare A or B, you can continue to fully fund your HSA. When you do decide to retire, you’ll need to stop contributing to your HSA six months before applying for Medicare. 

Start building your HSA today

If you’re covered under a qualified HDHP with an HSA component, contribute as much as you can, up to the maximum allowed. The sooner you begin setting money aside in an HSA, the greater the likelihood it can play a role in covering your healthcare costs in your retirement.

Invest dollars you don’t need to meet medical needs today to build wealth for the future. Having a well-funded HSA in retirement may allow you to dedicate other savings and sources of retirement income to meet other living expenses outside of healthcare needs.

An HSA may be one of many different sources of income in retirement. Read more about the importance of creating a tax-diversified retirement income strategy.