Nov 4, 2022

Can a Health Savings Account Help You Save for Retirement?

Don't forget about this tool! A Health Savings Account (HSA) is an often-forgotten way to save money for medical costs. Find out how HSAs can help you save money on taxes as you plan for your retirement.

The BEST Retirement Savings Account

Can a Health Savings Account Help You Save for Retirement?

When you retire, your health care expenses will probably increase. Even if you are fortunate to live a long time and remain healthy, you will eventually reach an age where maintaining your health will become more expensive. You'll probably have to pay for Medicare when you retire even before that. This is just another justification for beginning your retirement savings as soon as possible.

Health Savings Accounts are a frequently disregarded tool for consumers to put money aside for potential medical expenses (HSAs). HSAs allow individuals and families to invest tax-free funds into accounts that can be utilized only for eligible medical expenses as the account holder ages.

What are HSAs?

A Health Savings Account (HSA) is a special savings account that lets you save money for medical costs without having to pay taxes on it. Unlike Flexible Spending Accounts (FSAs), which must be used within a calendar year, Health Savings Accounts (HSAs) can be invested for use in future years and do not expire if they are not used. They're also different from Health Reimbursement Arrangements (HRAs), which are accounts set up by employers and must be used to pay back employees' health care costs. HSAs can be set up for just one person or for the whole family. If they stay in the HSA or are used for qualified medical expenses, they are not subject to penalties or federal income tax. Also, when you retire, they basically turn into an IRA (subject to federal tax), so they're a great way to save money overall.

Here are some other major differences:

The Pros of HSAs

Contributions are tax-deductible: The money you put into an HSA is tax-deductible, which means that it lowers the amount of taxable income you have to report on your taxes. For example, if you make $50,000 and put the most you can into an HSA in 2022, which is $3,650, your taxable income drops to $46,350, which is a difference of $3,650. Depending on your tax bracket, this will save you anywhere from 10% to 37% on that $3,650, or between $365 and $1350 in taxes.

Tax-free withdrawals: When it's time to pay for medical bills, you can take money out of your HSA account without being taxed. This includes bills for family members if you have a family plan. HSAs are the only accounts that give you a tax break when you put money in and still let you take money out tax-free (for qualified expenses).

Penalty-free withdrawals for non-medical expenses in retirement: If you use some or all of your HSA balance after age 65 as part of your plan for retirement (by taking it out as cash or using debit cards that are directly linked to this account), you won't have to pay a federal income tax penalty on those withdrawals. If you don't use the money for medical costs, you will have to pay federal taxes on the withdrawals from your HSA when you retire.

How to Create a User Account

There are various ways to open a health savings account. HSAs are provided by numerous banks, credit unions, and broker-dealers. They are frequently used in conjunction with a checking account or other financial goods, such as investing services. If your primary source of health coverage is a health savings account (HSA), you may find it more convenient than utilizing a standard bank account. Find out if HSAs are included in the benefits if your company offers health insurance. Some businesses do provide them.

Need assistance to get started today? The team at Vincere Wealth Management can help you with setting one up. Speak to an advisor.

Here are the Best Health Savings Account (HSA) Providers According to Investopedia.

How to Make Contributions to Your HSA?

At any time during the year, you can put money into your HSA. In fact, you can make payments even if you are already on Medicare. Also, if your deductible is high enough, you may still be able to get an HSA even if you don't have an HDHP. For a single person, your deductible must be at least $1,400, and for a family, it must be at least $2,800. The deductibles, copayments, and coinsurance can't add up to more than $7,050 a year for an individual or $14,100 a year for a family (for 2022).

In 2022, the most you can put into a health savings account (HSA) as an individual or a family is $3,650 and $7,300, respectively. In 2023, a single person can only put $3,850 into an HSA, while a family can put $7,750. You can make a $1,000 "catch-up" contribution if you are 55 or older during the tax year. If your spouse is 55 or older, they could also make a catch-up contribution, but they would need to have their own HSA.

Using Tax Advantages

Learn about the three tax advantages and how HSAs work:

If you have a health plan at work or on the private market that can be used with an HSA, you can put money into an HSA. Most people use HSAs to save money for current medical costs that aren't covered by their health insurance. But if you can pay for these costs out of your own pocket, an HSA is a great way to save for retirement because it is tax-free in three ways.

Many people put money into their HSAs through payroll deductions before taxes are taken out. This means that their contributions are also not subject to FICA taxes. As long as you are enrolled in a qualifying health plan, you can set up an HSA outside of work and put money into it with money you earned after taxes. You can then deduct this money from your personal tax return. These contributions can grow tax-free and can be taken out tax-free to pay for eligible medical costs now and in the future, including costs that come up during retirement. If you are no longer covered by a qualified plan, you can't make any more contributions, but you can keep the account and your contributions will continue to grow tax-free.

It gets better: Unlike most flexible spending accounts (FSAs), funds in an HSA can stay in the account from one year to the next. Your HSA can earn interest or earnings, and you can even take it with you if you change jobs or retire!

Speak with an advisor at Vincere Tax to learn how to TURBOCHARGE your tax savings strategies today!

HSAs are an excellent way to save money for retirement health care expenses because you can use them to pay for non-medical expenses as well. This means that you can make interest-bearing investments without being concerned about taxes. You won't be required to pay taxes on the money you withdraw from your HSA when you use it to cover medical expenses or other costs associated with your healthcare.

HSAs have some fantastic benefits that make it easier to manage money today in addition to being great for saving money for future medical expenses. People who don't receive insurance via their employers or who have inexpensive insurance can save more with HSAs than they otherwise could. Nowadays, many workers hardly ever receive any eye protection from their jobs. You can always use your HSA to cover eligible medical costs such as nursing care, hearing aids, and other services like eye and dental care.

After you retire, you can spend the money in different ways:

1. Help the Transition to Medicare

You might still require health insurance if you retired before turning 65 until you are able to enroll in Medicare at that age. The two exceptions to this rule are paying for health insurance purchased through an employer-sponsored plan through COBRA and paying premiums while receiving unemployment benefits. In general, HSAs cannot be used to pay for private health insurance premiums. At any age, this is true, but it might be advantageous if you lose your job or decide to quit working before you turn 65.

2. Cover Medicare Premiums

Your HSA can be used to fund some Medicare expenses, such as the Part B and Part D premiums for prescription drug coverage. However, you cannot use it to cover the costs of a Medigap policy. You can utilize an HSA to cover your portion of the expenditures if you are over 65 and your company provides health insurance.

3. Costs for Long-term Care

A "tax-qualified" long-term care insurance policy can be paid for in part using contributions from your HSA. You can start doing this at any age, but as you become older, you'll have access to more tools and options.

4. Pay for Other Expenses

When you turn 65, you can use your HSA to pay for anything that isn't a qualified medical expense. You could, for instance, use it to buy a boat. But you won't be able to take full advantage of the tax savings because you'll have to pay state and federal taxes on those distributions because they aren't qualified medical expenses.

Let Your Estate Plan Include HSAs!

If your medical costs are much lower than average (or if you don't live that long), you might have money in your HSA that you can give to your heirs. The rules are complicated, so it's best to talk to an estate planning attorney or financial advisor.

Get in touch with Tim Uihlein, here, who is a resident expert on estate planning at Vincere Wealth Management.

There are usually three things to think about when deciding what happens to your HSA assets after you die:

1. The spouse is named as the beneficiary

If you name your spouse as the beneficiary of your HSA, it will become your spouse's HSA after you die, and it will still be tax-free in three ways.

2. The spouse is not the person who will get the money

If your spouse isn't the beneficiary of your HSA, the account stops being an HSA, and the beneficiary has to pay taxes on the fair market value of the HSA in the year you die.

3. Your estate will get the money

On your final tax return, you will write down the fair market value of your HSA. Many people would choose to name the surviving spouse as the beneficiary over the other two options. But if you don't have a surviving spouse, you may want to think about how to pay the least amount of taxes. In that case, you might want to name your estate or the person who will get the money as the beneficiary, depending on who will pay the least amount of taxes. Work with people who know about taxes and estate planning to figure out which option is best for you.

Tip: If you name your estate as the beneficiary of your HSA, it will likely become a probate asset and will still need to fit into your overall estate plan.

Consider this:

When they turn 72, the majority of Americans must take required minimum distributions from their traditional IRAs and 401(k)s and pay taxes on those distributions. There is no set minimum that must be taken from an HSA.

If you want to safeguard your retirement now and in the future, you should consider getting an HSA since it can help you save money on taxes in three different ways.

Wrapping Up

Health savings accounts are ultimately a fantastic method to save for retirement. You won't ever have to pay taxes on the money you utilize for any current or upcoming medical expenses. When you deposit or withdraw money from your account, they also assist in tax savings. Therefore, you should definitely take advantage of it if you want to save more money or if your workplace provides it as part of their benefits package.

Get in touch with Tim Uihlein, here, who is a resident expert on estate planning at Vincere Wealth Management.

Josh Bennett

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