A Health Savings Account (HSA) is a tax-advantaged account you contribute money into and use to pay for healthcare expenses. But the benefits go far beyond that.
Do you want to lower your taxes, pay for medical expenses, and build wealth? All with the same account? In this post, you will learn how HSA accounts can be a powerful retirement planning tool.
First let's cover the basics of HSA accounts.
Who can open an HSA account?
There are four requirements to qualify to open an HSA account:
An HDHP is health insurance where the deductible is higher than typical health insurance. For 2019, the minimum deductible is $1,350 for an individual and $6,750 for a family plan.
The benefit of a High Deductible Health Plan is the cost is typically lower that other insurance. You can use that monthly cost savings to fund your HSA account.
You can pay for your healthcare expenses out of that HSA account and let any remaining money grow.
Preventative care is covered under an HDHP, so you don't have to pay for annual wellness visits.
HSA Contribution Limits
There are limits to the amount of money you can contribute to an HSA account each year.
Differences depend on the type of HDHP insurance you have (individual or family) and your age by the end of the current year.
HSA contribution limits
Individual age 55 or older
Family age 55 or older
Contributions must be made in cash. You can't transfer stock or mutual funds or other securities you own to fund your HSA account.
A special rule allows you to transfer money from your IRA to fund your HSA. You may only do this once. And the contribution still must be in cash, not securities.
Triple Tax Advantages
There are 3 tax advantages to using an HSA account.
Tax Deductible Contribution
You can deduct your HSA contribution from your gross income. If you make $50,000 a year and contribute $3,500, you reduce your taxable income to $46,500. There are no income limits on the deductibility.
Tax Deferred Growth
If you invest your HSA contributions into the stock market (and you should), you won't pay any tax on the account growth. If you receive interest payments, dividends or if your investments grow, you don't report those on your tax return.
Tax Free Withdrawal for Healthcare
When you use your HSA account to pay for healthcare expenses (or reimburse yourself), you will still pay no taxes on that withdrawal. The list of eligible health expenses is long and includes health insurance premiums.
An HSA account combines the tax advantages of a Roth IRA and a Traditional IRA. With the Roth, you don't get a deduction on your contribution, but withdrawals are tax free. With a Traditional IRA, you (may) get a deduction on the contribution, but you pay income tax on the withdrawals.
Saving on taxes is one the biggest benefits of opening a Health Savings Account.
Use Your HSA for Retirement
Unlike Flexible Spending Accounts (FSA), Health Savings Accounts roll over each year and always belong to you. If you leave your job or stop working, the HSA account is still yours.
Because of this, HSA accounts can help you build wealth for retirement. You'll certainly have medical expenses to pay, but you can also use your HSA for retirement income.
You must be 65 to use the HSA money for income. And you will have to pay income tax on any withdrawals. But your Health Savings Account can be a good backup to your other retirement accounts, like a Roth IRA or 401k account.
Of course, you should primarily use your HSA money for medical expenses.
Summary of HSA Accounts
HSA accounts are a great ways to lower your taxes, pay for medical expenses, and build wealth for your retirement.
All that's required is that you have a High Deductible Health Plan, are not enrolled in Medicare, and are not a dependent on someone else's tax return. You just need to open your HSA account, invest your contribution and let your money compound.
Then your HSA can provide you with tax-free healthcare money and retirement income down the road.