Why HSAs Make Sense for Retirement Planning

The primary purpose of an HSA is to cover the costs of qualified medical expenses. These expenses include prescription drug fees, hospitalizations, and some insurance policy copayments and coinsurance. You can contribute to the HSA if you have a qualifying high-deductible health insurance plan (in 2020, plans with minimum deductibles of $1,400 per individual or $2,800 for a family).

FSAs also cover certain medical costs, but they work alongside employer-sponsored health insurance policies. Basically, you invest a portion of your paycheck in the FSA. If you have qualifying expenses, you can take that money out of your FSA without paying taxes.

While HSAs and FSAs can be used for similar medical expenses, the funds in an HSA can be withdrawn for other purposes, which makes them great for retirement. Here’s what you need to know:

• HSA money can be invested. Through careful investment, your money can grow, and you can still take funds out to cover medical expenses.
• HSA money can be withdrawn. If you take money out of an HSA before age 65, you’ll pay a 20 percent penalty plus income taxes. Once you’ve reached age 65, however, you’ll only pay taxes — and when you withdraw money to pay for medical expenses, you won’t pay anything.
• Contributions to an HSA are tax deductible. There’s a limit on how much you can contribute per year, but if you fall short of the maximum, you can contribute more through a catch-up contribution later in your career.

Those factors make HSAs an excellent resource. You can also contribute to both HSAs and FSAs in some circumstances — if you already have a Flexible Spending Account, find out whether it’s “HSA-compatible" before researching HSA providers.

Using an HSA for Retirement Savings

To get the most from your HSA, you should try to invest as much as possible each year. The annual contributions for an HSA change from year to year; in 2020, the amount was $3,550 for an individual and $7,100 for a family.

As mentioned earlier, you can make catch-up contributions later in life if you’re unable to make the maximum contribution — but catch-up contributions are capped, and to invest your HSA funds effectively, the safest course of action is to max out your contribution every year.

After retirement, you can withdraw funds from your HSA, paying only income taxes — or you can use the money to pay for premiums for Medicare Part B, D, or Advantage plans. Your growing Health Savings Account can give you tremendous peace of mind, and with careful investment, you can create a substantial nest egg for your golden years.

Finding an HSA Account Provider

Before setting up and funding your HSA, you’ll need to choose a provider. Many banks, credit unions, and other financial institutions offer HSAs, so you’ll need to review a variety of options to find a provider that meets your long-term financial goals.

If you’re planning on investing (and growing) your HSA, look for a provider that offers a variety of investing options — whether you’re putting the money into a managed mutual fund or taking a hands-on approach, you’ll want a provider that gives you plenty of flexibility.

Factors to consider:

• Investment Fees
• Investment Return Averages (for Managed HSAs)
• Customer Service
• Bank or Financial Institution Reputation

While all HSAs work in roughly the same way, your choice of provider can significantly affect the long-term value of your account. It’s a good idea to commit time to your research.

Using Online Resources to Find HSA Information

A Health Savings Account offers tremendous tax benefits, and whether you’re approaching retirement or starting your career, starting an HSA can be a wise decision. To find a provider, look for at least 3-4 financial institutions that offer HSAs. Research the features, fees, and terms of each service.

By making regular contributions each year, you can grow your HSA and begin your retirement with peace of mind. The internet provides the resources you need to take the first steps.