Unlock the Benefits of HSAs: A Retirement Account You Can’t Afford to Ignore

Discover why HSAs are a powerful retirement savings tool.

The Health Savings Account (HSA) is among the most tax-wise financial tools available.

When discussing retirement accounts, the health savings account (HSA) is often overlooked in favor of the more common 401(k) and individual retirement account (IRA) options. Even though HSAs weren’t created with retirement in mind, they can still be essential to anyone’s overall financial strategy. The same is true for the elderly in particular.

A Guide to the Health Savings Account

The U.S. government promotes health savings accounts (HSAs) as a means of helping citizens prepare for future medical costs. Those with high-deductible health plans can use them to save up for out-of-pocket medical expenses like deductibles and co-payments.

The tax deductibility of HSA donations makes them a favorite of bookkeepers. These funds can be invested for growth if emergency medical care is required after some time. For those who expect to need medical care in the not-too-distant future, this can serve as a “just in case” savings account. Provider-specific differences exist in the specific investments available. Still, in general, many firms let you choose from various mutual and exchange-traded funds and provide the means to determine the optimal allocation. Individual stocks and bonds can be purchased through some of them. But, earnings within the HSA are not subject to taxation.

Distributions can be made tax-free when used to pay for qualified medical expenditures, and distributions for various medical, dental, mental, and vision expenses are exempt from taxes. This is the final piece of the “triple tax benefit,” which may be worth thousands of dollars to those who make the most of their tax-advantaged accounts.

The maximum amount you should put into an HSA will vary from policy to policy. In 2023, the maximum deductible for an individual approach is $3,850, while the maximum for a family policy is $7,750. Those 55 or older are entitled to even more benefits thanks to catch-up provisions. There is no maximum income requirement to contribute to a health savings account.

The HSA’s most significant negative is the possibility of incurring penalties for disbursements that do not meet the requirements of the account. Distributions for non-qualified costs will be taxed as regular income plus a 20% penalty if you’re under age 65. You should use these vehicles cautiously, as with other qualifying accounts. Instead, they should be part of a unified set of financial tools.

The many benefits of HSAs for retirees

HSAs are like 401(k) with the tax advantages of a Roth IRA. Contributions to an HSA are paid before taxes are deducted from earnings, like a 401(k) or standard IRA. Over time, the boost from the tax write-off can become significant. Qualified withdrawals are tax-free, much like those from a Roth IRA. Withdrawals from a 401(k) will often be taxed, while Roth contributions will not be. The Health Savings Account (HSA) combines two advantageous circumstances, allowing you to avoid paying taxes while receiving high-quality medical care. This is something you’d find in only some retirement plans.

HSAs offer a unique perk for retirees that isn’t accessible to younger account holders. Withdrawals from a health savings account are penalty-free for anyone 65 and older who haven’t used the money for medical care. Although the payout is still considered regular income for tax purposes, this plan is similar to a 401(k) or traditional IRA but with an added benefit.

The typical medical bill for a senior is about $4,000 per year. With healthcare costs often growing as people enter their later years of retirement, that sum is subject to price hikes that have historically surpassed the overall inflation rate. For retirees on a fixed income, that can be a severe problem.

There is no more effective vehicle for healthcare savings, and retirees have a good shot at being able to use the HSA to its full tax advantage.