How to Leverage an HSA in Retirement

Piggy bank, stethoscope, and pad of paper with HSA written on it.

You want to protect your future and thrive in retirement as much as possible. But sometimes it feels like you need a PhD in finance to understand how all the different retirement vehicles work – especially when it comes to figuring out your future health care.

That’s where a Health Savings Account (HSA) comes in. Although it has the word “savings” in the title, using an HSA in your retirement planning doesn’t require a PhD and it can protect your future in many distinct ways beyond savings.

HSAs are one of the most underused tax saving tools for retirement. Even if you already have an HSA, you might not be fully taking advantage of all the benefits. Here are some simple ways to understand a Health Savings Account, how to leverage it, and how this long-term investment vehicle can play a more robust role in your retirement strategy. 

What is a Health Savings Account?

A Health Savings Account is an investment account that lets you save for qualified medical expenses. But that’s not all: the money you put into the account is tax-deductible, and the money you take out is tax-free (when used for qualified medical expenses). 

Maximizing your HSA means shifting your mindset – this isn’t a savings account for earning interest or daily use, and money in your HSA should not be in cash. Rather, you can invest this money similar to your 401(k) or other retirement or investment account. This is a colossal win, especially as you get closer to retirement.

Why? Because you can grow your nest egg uniquely dedicated to retirement expenses – from Medicare Part B and D premiums, to copays for a range of healthcare professionals. Viewing your HSA as an alternate retirement savings tool can help you confidently put money away as an investment that will help deter you from “dipping” into the account for minor expenses you can still easily cover out of your annual budget.

Who is Eligible for an HSA?

Enrolling in a high-deductible health plan (HDHP) is the most critical requirement for owning one of these magic accounts. Check out Healthcare.gov for a high deductible plan’s most up-to-date definitions and minimums. If you get medical insurance through your employer, they will likely provide the benefit of setting up an HSA. Some employers will even contribute to your account. 

If your employer does not offer an HSA with your high-deductible insurance plan, you can still set up your own account. If you are self-employed with a high deductible plan, you should also set up an account for yourself.

How Much Can You Contribute to an HSA?

The IRS sets limits each year on how much you can put into an HSA account. In 2023, it is $3,850 for an individual and $7,750 for a family. In 2024, these limits will go up to $4,150 and $8,300 respectively. These figures might seem small at first, but the benefit of a HSA is that it allows for funds to build over time. 

Unlike a Flexible Savings Account (FSA), which typically has lower contribution limits and doesn’t allow you to carry funds over, a HSA does. This means any money remaining in your HSA can be carried over year after year.  

This also means that money in your HSA can accumulate over time, which is often a valuable retirement benefit if you’re able to start contributing early in your career. 

Imagine opening a HSA at age 25. If you add the maximum to this account each year and then decide to use this money only after you’re no longer working at age 65, over time, that money genuinely adds up.

Ultimately, you can save during your working years then use this money for medical costs in your non-working years when medical bills will most likely be higher.

You Can Play Catch-Up

The IRS allows people over the age of 55 to play “catch-up” by putting money into an HSA for an extra $1,000 per person over the traditional contribution limit. This is important not only for you but also your spouse – and another commonly overlooked benefit – given your working spouse can add extra money at age 55.

Additionally, non-working spouses or spouses covered by their partner’s HDHP plan can also open their own HSA and add money if they are over the age of 55. The catch here is a non-working spouse must open their own account since there is no such thing as a joint HSA account.

Are There Income Restrictions for Contributing After Retirement? 

The amount of income you earn does not affect your ability to add money to an HSA. This is much different from other tax-saving opportunities like IRAs and Roth IRAs. For example, if you retire at age 60 and are covered by your employer’s medical plan until age 65, you can continue to contribute to your HSA for the next five years even though you have no earned income.

Overall, there are no income restrictions for contributing to your HSA. High-income earners and people without income can still contribute to an HSA as long as they’re covered by a high-deductible health plan.

How Does Medicare Impact My Ability to Contribute?

When you enroll in Medicare Part A, you can no longer contribute to your HSA. This means that for people who enroll in Medicare at age 65, they can no longer contribute to their HSA account, which can come as a shock to some. 

There is one upside, however: you can now spend money in your HSA on Medicare premiums and other medical-related expenses. Why is this the case? Medicare Part A becomes your primary insurer when you sign up for it, and Medicare Part A is not a high-deductible health plan.

The Hidden Gem in Your HSA Strategy

There is one other significant perk regarding the Health Savings Account. Once in your lifetime, you can use money from your IRA to make your annual HSA contribution.

Why is this a gem? Because you’re able to leverage money contributed to your HSA tax-free. Not only is it deducted from your current taxable income once you contribute, you can also spend it without tax consequences on qualifying medical expenses. 

Leveraging Your HSA in Retirement

Your HSA is an excellent tool to invest and grow your wealth in a tax-efficient way. Dig in and use your HSA as a retirement savings tool. Run some cost estimates to determine what medical expenses you might anticipate in retirement. These expenses might include Medicare Part B and D (or Medicare Advantage) premiums, copays, and more significant surgeries or expenses (knee replacement, etc.). 

Your estimates don’t have to be spot-on. Even having a loose idea of what you might spend on medical expenses in retirement can help you to set an appropriate investment goal for your HSA. This can help you contribute to and allocate your investments accordingly, taking advantage of catch-up contributions as you get closer to retirement.

Know What You Could Be Missing

If you are offered a high deductible health plan or are already in one, you can certainly see the many cost-saving benefits of pairing it with an HSA. Even with a modest $5,000/year investment over 20 years at 6% interest, your HSA account could be worth over $2,267,000 when you retire. That could be a lot of security and protection for your golden years. 

Always remember, before taking any money out of your HSA to pay for medical expenses today, consider what those funds could ultimately be worth when you retire. Also remember, your financial planning and retirement strategies should always be tailored to fit your unique needs. As with all investment accounts and tax-saving opportunities, consulting with an Abacus financial advisor today can help bring you clarity and peace of mind for your future.

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