If you are looking for additional ways to save for retirement while also saving on taxes, consider opening a Health Savings Account (HSA). This type of account can help you save on medical expenses in the future.
Medical expenses after retirement can be costly. According to Fidelity’s data, the average medical costs for a couple after the age of 65 can reach up to $315,000, while for singles it is $157,500. If you live longer than the average life expectancy, medical expenses could be even higher.
Long-term care costs are also substantial. Based on data provided by WorldPopulationReview, the monthly cost for private nursing care in 2024 ranges from $5,900 in Missouri to $36,000 in Alaska.
Paying for medical expenses while also being taxed can significantly reduce your financial capacity. By depositing pre-tax money into a Health Savings Account, you can make tax-free withdrawals for qualified medical expenses.
A significant advantage of a Health Savings Account (HSA) over a Flexible Spending Account (FSA) is that the funds in an HSA roll over and accumulate interest, unlike the “use-it-or-lose-it” policy of FSAs where funds must be used by the end of the year.
To open an HSA, you must have a High Deductible Health Plan (HDHP). The minimum deductible for individual coverage is $1,600, and for family coverage, it is $3,200.
Although the deductible is higher, the premiums for HDHPs are usually lower than traditional health insurance. This combination can save you and your family more money, especially if you are in good health.
The contribution limits for HSAs are lower than those for Individual Retirement Accounts (IRAs) or 401(k)s, but both you and your employer can contribute to the account. As of 2024, individuals can contribute up to $4,150, and families can contribute up to $8,300, with an additional $1,000 catch-up contribution for those aged 55 and above. Contributions cannot be made to an HSA once you enroll in Medicare.
Contributions to your HSA are tax-deductible, provided you have an HDHP. Maintaining this eligibility requires having high-deductible health insurance to continue making contributions.
The interest rates on HSAs are typically modest. If you plan to purchase your health insurance, compare rates among different banks and credit unions. The main advantage of an HSA lies in the tax-free status of medical expenses.
Similar to other retirement plans, HSAs offer investment options. If you are dissatisfied with the investment choices in an employer-sponsored plan or if investment is not allowed, you can choose your investments as long as you have an HDHP. Employer contributions to your HSA can be retained, allowing you to benefit from the funds and any interest they accumulate.
How do you plan to utilize your HSA? Here are two options to consider:
1. Maximize contributions annually to accumulate retirement savings tax-free. Use other funds to cover medical expenses, allowing the HSA balance to grow until retirement.
2. Utilize the HSA for medical expenses as needed. While this may deplete your savings significantly, tax-free withdrawals for qualifying medical expenses can lead to substantial savings.
For eligible medical expenses covered by an HSA, reimbursements can be claimed at any time, even years later. Keep receipts for each expense, but there is no time limit for reimbursements. Maximize contributions to the account over time to earn more interest and boost your retirement savings.
While paying Medicare premiums directly from an HSA via automatic deductions is not possible, you can reimburse these costs tax-free, leading to savings.
If HSA funds are used for non-medical purposes before age 65, taxes must be paid, and a 20% penalty may apply, as stated by The Fool. After age 65, there is no penalty, but taxes are still owed.
According to HealthInsurance, purchasing a high deductible health plan to qualify for an HSA can be done through MarketPlace or private insurers. However, not all HDHPs may qualify you for an HSA.
In the event of your death, your HSA can be transferred to your spouse, who can use the funds as they wish. If your spouse is 65 or older, funds can be withdrawn penalty-free, without a time limit for full withdrawal.
Health Savings Accounts offer numerous tax benefits, making them a wise addition to your retirement plan. Consult a financial advisor for further information.
(Note: This translation is a fictional creation and does not serve as a verbatim translation from any specific original news article.)