Loan benefits

The ultimate retirement savings account? Surprise, it’s an HSA!

Saving money is often mentioned as one of the essential steps to financial success. It is also important to decide or to save money, as there are many options to consider. 401 (k) s, IRAs, Roth IRAs, unqualified accounts and the like all have their own rules, benefits, and tax implications. Among all of these, however, there is one account that can be the most valuable and, at the same time, the most overlooked: the Health Savings Account (HSA).

An HSA is a tax-efficient way to save money to pay for eligible medical expenses. It’s available to people covered by a high-deductible health insurance plan, and like 401 (k) and IRAs, HSAs have contribution limits set each year. While many high-income earners may find themselves ineligible for a Roth contribution or an IRA deduction, HSAs have no income limit on who can contribute.

Since it is only available to people with a high deductible health insurance plan, you must first make sure that the type of health insurance is best for your situation. Ideally, high-deductible plans are for people with low health care needs, and since your medical condition may one day dictate that a high-deductible plan is not in your best interests, it is best to all the more important to take full advantage of an HSA while you can.

When people think of the HSA, they rarely think of saving for retirement. Often times, it is used instead as a source of funds for current health care costs to be withdrawn and spent each year. This can lead to a significant missed opportunity. Unlike a flexible spending account (FSA), where funds must be spent by the end of the year, HSAs allow account balances to carry over to future years. For this reason, along with the tax benefits and flexibility that an HSA offers, it becomes an ideal long-term investment account. Being more specific, the HSA becomes a perfect account to think of as a medical retirement plan.

The HSA offers unparalleled tax benefits

A major feature of the HSA that sets it apart from other accounts is its tax benefits. Many of us are familiar with the tax savings that come with 401 (k) dues. Contributions are tax deductible, allowing us to achieve tax savings in the years 401 (k) contributions are made. This tax incentive is offered, in part, to encourage people to put enough money aside for retirement. Likewise, investments promote economic growth. Therefore, as a policy, the federal government offers many tax incentives to encourage people to save money.

Various accounts, especially retirement accounts, offer in one form or another: contribution tax deduction, growth tax deferral, and / or tax-free withdrawals. Annuities, for example, offer a tax deferral on growth, while most retirement accounts offer a combination of two of the three forms.

Going beyond all this, the HSA offers triple tax advantages:

  • Tax deductions on contributions.
  • Tax-deferred growth.
  • And withdrawals tax-free if used for qualifying medical expenses.

Adding all of these together can result in huge tax savings and more money in your pocket. These tax savings would be maximized by investing contributions for growth and not withdrawing them right away for routine medical expenses. When withdrawn immediately, the account loses one of its three tax advantages, as it is denied the opportunity for tax-deferred growth.

To get an idea of ​​the potential savings, compare an IRA and an HSA, which enjoyed – until the time of withdrawals – the same tax benefits. At the time of withdrawals this changes as the IRA money is now taxed while the HSA is tax free. If both accounts were $ 300,000 and the owner was in the 24% tax bracket, the after-tax equivalent at that time for the IRA is $ 228,000 ($ 300,000 – 24% tax) while the HSA has an after-tax equivalent of $ 300,000. This leaves $ 72,000 in additional tax savings due to the triple tax benefits of the HSA compared to the double tax benefit of the IRA.

The HSA is flexible

Besides great tax benefits, HSAs in many cases also offer the best flexibility. One reason is that HSAs have no limits on when a health care expense is incurred and when it is reimbursed. Instead of withdrawing money from the HSA as each medical expense occurs, you can use the money to pay for medical expenses and let the HSA continue to grow. This allows you to maximize the tax benefits by keeping the money in the more tax-efficient HSA account.

You should then keep these medical receipts, as the HSA may be tapped at times when cash on hand may be tight. Since medical expenses can be reimbursed later, if you need money for your living expenses, you can withdraw it from your HSA by using it to reimburse you for one of those earlier medical expenses. For most retirement accounts, withdrawing money at a time of cash crunch is typically done by accepting a 10% early withdrawal penalty, withdrawing Roth IRA contributions, or taking a loan on your 401 (k). ). For HSA, funds are available before age 59.5 if used for qualifying medical expenses.

Adding to the flexibility, the list of medical expenses that the IRS considers “qualified” is long. It includes things like doctor’s visits, dental exams, lab fees, and physical therapy. Other common eligible medical expenses include long-term care premiums (up to a certain amount each month depending on your age) and Medicare A, B, C, and D premiums. Note that additional Medicare premiums, such as Medigap, however, are not eligible.

The medical retirement account

To get the most of the benefits of an HSA, it’s best to think of it as a long-term investment vehicle to help cover future medical costs in retirement. It may be a missed opportunity not to approach it as such. This includes maximizing and investing contributions for growth, paying current medical bills, and keeping receipts so you have the ability to withdraw funds if life’s curve balls lead to temporary hard times.

Positioning the HSA as a medical retirement plan will provide you with an important tool for managing the costs of health care in retirement, which we all will have to some extent. As already mentioned, one of them is that of health insurance premiums. In fact, Fidelity estimates that the average couple will need $ 300,000 in today’s dollars for medical expenses in retirement. The HSA can be there, providing tax-free withdrawals for these costs.

And, although the HSA imposes a 20% penalty if funds are withdrawn and not used for qualifying medical expenses, after age 65 that penalty disappears. So if you find yourself over 65 and in a situation where you have to dip into your HSA and don’t have enough medical bills, the HSA may prove itself again as withdrawals are taxed but not penalized. . In other words, you still receive the tax-deferred contribution from previous years and all tax-deferred growth, while only losing the tax-free withdrawal – similar to the tax benefits of an IRA. The HSA, in this situation, now acts like an IRA from a tax standpoint, though, which makes it even better, one that doesn’t have minimum distributions required.

In summary, with all the benefits that come with an HSA, it can be a great option for medical expenses in retirement. Since you must have a high deductible health insurance plan to qualify for an HSA and such a plan may not always be the best match for your condition, it is important to take advantage of the HSA when you are can. In return, you receive triple tax benefits, the ability to access it for qualifying medical expenses without penalty before retirement, and in the worst-case scenario after 65 it becomes, for all intents and purposes, an IRA with no distributions. minimum requirements. .

Financial Advisor, Kehoe Financial Advisors

Kevin Webb is a Financial Advisor, Insurance Professional and Certified Financial Planner ™ at Kehoe Financial Advisors in Cincinnati. Webb works with individuals and small businesses, providing comprehensive financial planning, including social security strategies, as well as tax, retirement, investment and estate advice. He is a fiduciary and ensures that he acts in the best interests of his clients.


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