HSA as Retirement Account

Health Savings Accounts have plenty of benefits. The one that stands out the most is the tax benefits. This helps the account holder pay for healthcare without paying taxes on the money either for themselves or their family. Although the initial intention behind funding HSA is to save up for health emergencies, they can also help you with retirement. 

Here is how HSA as a retirement account can help you in specific situations.

Tax-free withdrawals

The most noticeable benefit of an HSA is that you can withdraw money tax-free for qualifying health care expenses. Although this doesn’t cover everything, it pretty much includes the necessary healthcare services. Unlike your 401(k) or IRA, you aren’t also subject to early withdrawal penalties as there isn’t a minimum age before you can begin withdrawing money. 

The same also goes for when you don’t want to make any withdrawals. You don’t need to touch the money once you turn a certain age. However, there is one aspect of HSAs that we need to touch on while talking about this. If you enroll in Medicare, you can no longer contribute to HSA. Considering that this can only happen when you turn – being eligible to enroll in Medicare – you should have a long way to go on that. Even if not, the funds will remain as they are until you enroll in Medicare. 

Tax advantage

The contributions to an HSA are made up of pre-tax dollars; therefore, they are deductible. You can deduct up to the amount you contributed. However, there are contribution limits to an HSA. Learn more about how HSA contribution limits work.

Additionally, you don’t pay Social Security and Medicare taxes on them, regardless of the amount you contribute. That said, you save up 7.65 percent right from your payroll, which goes towards spending current or future healthcare services. 

Read more: HSA contributions deduction 2022

Funds remain for as long as you don’t use them

The funds on your HSA stay even if you switch employers or decide to retire. You can also earn interest. The ability to grow your money just by not touching them is one of the main reasons many choose an HSA over a Flexible Spending Account.

Catch-up contribution 

Like most other savings accounts, you get an extra contribution amount once you turn a certain age. For HSAs, catch-up contributions are available to those 55 and older that enable to contribute an additional $1,000.

HSA as only retirement account

The purpose of a Health Saving Account is to save up for current or future medical costs. Having an HSA solely for retirement isn’t a good idea. You should always invest in a dedicated retirement account like 401(k) or IRA. HSAs surely come in handy as they can grow tax-free, and you can withdraw without paying taxes, penalties, and subject to age limits, but it doesn’t replace a retirement account. 

Investing in both a retirement account and HSA can help in the long run. Nevertheless, as always, take a look at your situation. Understand the likelihood of needing funds to cover the cost of healthcare emergencies. For example, if you or anyone in your family has chronic illnesses that may require emergency care, it would be better if you funded HSA more than a retirement account. Still, you should not see it as the only way to set up your future.

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