Health savings accounts (HSAs) help you to pay for qualified out-of-pocket healthcare expenses. You can fund your HSA account during your working years and use it at any time. In addition to paying for healthcare expenses, HSAs can prove an effective investment option for retirees. In this article, we will discuss the HSA benefits for retirees.
Before we detail the HSA benefits for retirees, you need to know who can open an HSA account.
Who Can Open An HSA?
To open an HSA, you must be above 18 years and enrolled in a high-deductible health plan. As of 2023, a health plan with a minimum annual deductible threshold of $1,500 for individuals ($3,000 for families) is considered a high-deductible plan.
Apart from these, you must not be registered in Medicare (Part A or Part B) or Medicaid to contribute to an HSA. Also, you must not be claimed as a dependent by anyone on their tax return. Visit this link to learn more about the qualification requirements.
If you meet the above requirements, you can open an HSA account with any bank, credit union or insurance company. You can open an HSA account directly through your employer if they offer it. In such a case, you can make pre-tax contributions through payroll deductions. If you open an HSA account on your own, then you can claim contributions to it as tax deductions at the time of filing your return.
As of 2023, the maximum amount you can deposit each year into your HSA account is $3,850 for individuals and $7,750 for family coverage. If you are 55 or older, you can deposit $1,000 more above the government-mandated limits.
It must be noted that if somehow you become ineligible for HSA contributions later, you will be allowed to use the balance in your account for qualified expenses.
Now, let’s take a look at the HSA benefits for retirees.
HSA Benefits For Retirees
Putting money in HSAs could offer the following benefits to retirees.
Hat trick of tax advantages
Investing In HSAs Offers Three Types Of Tax Advantages
The first is that contributions made to HSAs are made pre-tax, and thus, they reduce the taxable income.
Secondly, the money in HSAs grows tax-free as long as you keep your money in that account.
Lastly, withdrawals from HSAs are not taxable, provided you use the money for eligible medical expenses. So whether you are planning to cover $2,000 for a diagnostic test or $200 for prescriptions, you can use the HSA to cover those costs without worrying about the IRS taxing your withdrawal.
These benefits are similar to what one gets with retirement plans like a 401(k) or IRA (individual retirement account). However, if used correctly, these benefits could prove better with HSAs.
Use It For Non-Healthcare Expenses
HSAs are mainly related to medical expenses. So you do incur penalties if you make an HSA withdrawal for non-healthcare purposes.
Such penalties, however, go away if you reach age 65. It means once you turn 65, you won’t be penalized for non-medical HSA withdrawals. You can even use your HSA if you need cash to repair your car or house.
Although you won’t be subject to penalties, the withdrawals you make will be subject to taxes if you use them for living expenses or other purposes. So, in a way, it is similar to levying a penalty, as you won’t really get the full amount if you use it for non-healthcare purposes.
Putting it another way, if you are under 65, any amount you withdraw for non-medical purposes will be subject to a 20% early withdrawal penalty, as well as income taxes. And, if you are 65 or above, you won’t face an early withdrawal penalty but will still be subject to taxes.
Invest In HSA Funds
Most people are unlikely to spend all their HSA money to meet medical expenses during their work years. So, it is sensible to invest the money so that it can grow tax-free.
If you have a significant balance in your HSA account, you can invest a part of it to keep pace or beat inflation. You have several investment options, including mutual funds or exchange traded funds (ETFs).
Though such investments could carry additional risk, in the long term, they can help you save more money for retirement. It would be better if you consult with your financial adviser to know the best option for you.
Portable And Anyone Can Contribute
Another benefit of an HSA account is that they are portable. It means that money will remain at your disposal even if you change your health insurance plans, switch employers, or retire.
Also, anyone can contribute to your HSA account, including your parents, friends and even strangers.
HSA funds could make your working life easier by providing you with a backup to cover your medical bills. However, you could magnify the HSA benefits if you leave its balance intact until your retirement.
It in no way means you should incur credit card or other debt to take care of your working life medical bills. It is not at all sensible. Rather you should only hold HSAs until retirement if you are capable of managing your regular healthcare bills. The reward for avoiding using the HSA until retirement will surely be advantageous in the form of you bringing a large balance with you into retirement.
If you are paying medical costs out of pocket to let HSA money grow, then make sure you keep the receipts. Once you retire, you can use those receipts to make tax-free withdrawals.
This article originally appeared on ValueWalk
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