Chances are you have considered using an HSA (Health Savings Account) to pay your out-of-pocket medical expenses. Even so, you may never have considered using one as an actual investment option for retirement, but maybe you should.
What is an HSA
An HSA is a tax-advantaged investment plan that allows you to save money to pay for healthcare costs. An HSA is available for people who have high-deductible health insurance plans. The distributions from an HSA are used to cover your out-of-pocket medical expenses.
Advantages of an HSA
- The major advantages of an HSA are the tax benefits that come with them. An HSA has three tax advantages.
- Your contributions are tax deductible.
- When your account appreciates or earns interest, those are tax-free as well.
- When you take money out of your HSA to be used on medical expenses that qualify under the rules of your HSA, those distributions are also tax-free.
Additional advantages of HSAs include:
- You don’t have to use the money you contribute in the same year, rather, you can leave it in your HSA for years to come.
- HSAs can invest in a wide variety of assets including real estate, precious metals, public and private stock, and more.
- Contributions to HSAs do not count toward your annual IRA contribution limit.
- Once the account holder has reached age 65, HSA funds can be distributed for non-QMEs. These distributions are subject to tax, but incur no penalty.
- There are no Required Minimum Distributions (RMD) such as required for Traditional IRAs.
Disadvantages of an HSA
Like with most things, there are disadvantages of an HSA that you should be aware of as well.
- If your deductible and out-of-pocket expenses for your health care plan don’t meet the required level, then you would not qualify for an HSA. As of 2016, that means you would need to be paying $1,300 out-of-pocket as an individual, and $2,600 for a family.
- If you take a distribution for non-medical reasons and you’re under 65 years of age, there is a 20 percent penalty charged.
- The allowed annual contribution limit is dependant on the age and if you are single or contributing for a family.
- Once you are in Medicare Part A, you can no longer contribute to your HSA.
How to Use an HSA for Retirement
If there is one truth in life, it’s that medical expenses have always gone up, and as you age, you have more of them. It’s impossible to know what your medical expenses will be as you get older, but chances are, they will increase.
With an HSA, you can hold off using your contributions and save them for your retirement years when you are more likely to need additional resources to pay for your medical expenses.
Keep in mind, if you use your distributions for medical expenses, they are tax-free, so you won’t have to worry about having to deal with a large tax bill.
In addition, if you don’t need to use them for medical bills, the contributions can be withdrawn to supplement your retirement income. If you’re 65 or over there will be no penalty, but you will have to pay income tax on the distribution as you would with other types of investments such as an IRA.
An HSA can be a great addition to your investment portfolio for your retirement years, but it does depend on having a larger out-of-pocket health care plan until you start on Medicare, and you will need to be lucky enough to stay pretty healthy as you age, so you don’t have to use your contributions before you retire.
If those two things hold out to be true, then you should consider using an HSA for retirement.
We’re here to answer all of your questions about an HSA and how one might fit into your investment portfolio.
If you’d like more information to see if an HSA is right for you, contact BP Financial today.