This account provides a “triple tax benefit,” yet 88% of the nation is not taking advantage. Rarely are investors able to have their cake and eat it, too. Regarding retirement savings, you are normally required to pay taxes on the funds you set aside. Traditional retirement funds, such as 401(k)s and IRAs, offer an upfront tax deduction. Contributing to them reduces your taxable income for the investment year, but you will incur taxes when you take the funds.
Roth versions of such accounts function in reverse: You fund them with money on which you pay taxes, and if you follow certain guidelines, you may take your assets and any earnings they’ve generated tax-free upon retirement.
Health savings accounts, however, offer tax-deductible contributions, tax-free growth on investments, and tax-free withdrawals for specified needs in retirement.
Don’t feel bad if you did not see HSAs as long-term investment accounts. The Employee Benefit Research Institute’s recent research shows that just 12% of HSA holders invest in assets other than cash. The remaining 88% are missing out, according to Jeremy Finger, founder of Riverbend Wealth Management and licensed financial advisor. HSA is an effective retirement planning tool, and it is preferred by financial experts if you qualify because of its triple tax advantage.
Here is how HSAs function and why experts encourage utilizing them to invest for long-term objectives.
How a Health Savings Account works
Health savings accounts are only available to those enrolled in health plans with a high deductible. For 2023, these plans have a minimum deductible of $1,500 for people and $3,000 for families. A deductible is an out-of-pocket amount for medical bills before your insurance kicks in.
Typically, subscribers in these plans pay reduced monthly premiums in return for greater deductibles.
Contributions to a HSA reduces taxable income and can be used to pay for medical expenditures. In this way, it may resemble a flexible spending account, a perk provided by many workplaces with more conventional insurance coverage. However, the HSA comes with additional advantages.
Unlike FSAs, which often have a “use it or lose it” clause, you own your contributions. If you do not spend the money during a given year, it will accumulate eternally.
You can also invest your HSA funds in stocks, bonds, ETFs, and mutual funds. Jake Spiegel, research associate of health and wealth benefits at EBRI, explains that if you can save a few thousand dollars a year and allow that money to compound over time, you might establish a good nest egg for retirement.
How to use an HSA for retirement savings
In 2023, the maximum contribution to an HSA is $3,850 (for individuals) or $7,750 (for families). Workers older than 55 can save an additional $1,000 each year, but once they join Medicare, they are no longer eligible to contribute.
Every dollar you invest reduces your taxable income in the investment year. Your funds will grow tax-free, and you will not be taxed as long as you withdraw them for approved medical costs.
Because of this, the optimal plan for an HSA is to invest in it like you would with any other long-term portfolio. Finger says, leave it there and let it grow; it’s comparable to having a second Roth IRA.
There are a few notable exceptions. If you have high-interest debt or have not established an emergency fund, you should prioritize reducing debt and developing an emergency fund. And if your work gives a matching contribution, your employer-sponsored 401(k) should be your first port of call for retirement savings. That’s a 50% or 100% return on your investment, according to Finger.
But if you have your financial bases covered, it may make sense to pay out-of-pocket for medical expenses and let your HSA funds grow. Simply save the receipts, preferably in an orderly digital file, instead of a shoebox.
Save your receipts; medical-related expense receipts never expire. After 20 years of spending, you may wish to take a luxurious retirement trip, Finger adds. You can withdraw $15,000 tax-free from your HSA by using your accumulated receipts.
In other words, the medical expenditures you paid for do not have to be concurrent. You may always repay yourself from your HSA if you have a receipt indicating you made a payment at some time. This is why the receipts should be digitalized, so they are not lost or faded.
In addition, there is a considerable likelihood that the money you invest today will be useful in retirement, even if it must be designated for healthcare needs. According to a recent Fidelity survey, the average 65-year-old couple can anticipate spending $315,000 on health care bills throughout retirement.