A Health Savings Account (HSA) is a place to set aside money for current health care expenses. But if you’re eligible to contribute to one, don’t underestimate an HSA’s value to your retirement plan. Most people recognize that health care spending will consume more of their budget as they age. A 2015 study by Fidelity projected the total medical expenses in retirement for a couple retiring at age 65 at $245,000. An HSA can help cover these costs in retirement, but first, let’s cover a few basics:
1) HSA’s are available exclusively to people with high-deductible plans defined in 2017 by a minimum deductible of $1,300 for individuals and $2,600 for families.
2) Increasingly employers are reducing the role they play health coverage by migrating from traditional plans to these high-deductible insurance plans.
3) HSA’s were designed to encourage folks to save for those higher deductibles. That encouragement manifested a unique combination of three tax breaks:
- A tax-deduction for your contribution in the year you make it (like your 401(k) or traditional IRA)
- Tax-free growth while funds remain in the account (like a 401(k), IRA, Roth IRA or 529)
- Tax-free withdrawals, provided there’s a corresponding medical or health related expense reported on IRS tax form 8889 (like the 529 for educational expenses).
4) Don’t confuse HSA with the better-known Health Care Flexible Spending Account, where most of the savings must be spent in same the calendar year you contribute. By contrast, an HSA allows you to invest the savings and compound earnings for decades.
5) Max contributions limits for 2017 are $3,400 for individuals and $6,750 for families. Plus an additional $1,000 “catch-up” when you turn 55.
Given the inevitability of medical expenses in retirement an HSA is arguably the best account for, at least a portion of, your retirement savings. It’s an additional tax shelter for those who can save income beyond the max contributions (allowable or advisable) to more traditional tax shelters like IRAs, 401(k)s, 529’s, etc. If you have a choice between a traditional health insurance plan and a high deductible plan, you’ll need to consider your specific health insurance needs, but particularly for those who only have high deductible plans (with reasonable investment options), contributing more than the minimum required for your needs in the current year might be one of the best retirement planning choices you could make.
If you follow this strategy, make sure you start keeping your receipts for all medical-related expenses. These can be used to make HSA withdrawals even years later.
For more details, see IRS Publication 969.
Another interesting article about tapping an HSA to pay Long Term Care premiums.