Here’s how an HSA can extend the quality of your life

When retirement costs between $1-$1.5 million, every penny of tax-preferred savings matters. Here’s how your health savings account (HSA) can help.

Sure, your health savings account (HSA) will help you save money on eligible healthcare expenses in the short term… but did you know that contributing regularly to this triple-tax advantaged account can also extend the quality of your life down the line? Especially in retirement? Well, you’re in for a treat!

The Basics

HSAs are tax-advantaged accounts that help offset the cost of healthcare. With an HSA, you’ll tuck away pre-tax dollars, like an IRA or 401(k), except it’s used to pay for eligible medical costs such as prescriptions, copays, and certain over-the-counter (OTC) medications.

To get an HSA, you must be enrolled in a high-deductible health plan (HDHP) that’s designated as a Consumer-Driven Health Plan (CDHP), which means that your deductible is at least $1,500 for an individual or $3,000 for a family, and that other rules are in place related to what your insurance can and can’t pay before you meet your deductible. 

HDHPs tend to have a lower premium per month in exchange for more costs for services if you have to use them. While that may seem risky, you can save a lot of money toward retirement expenses if you strategize. So even if you aren’t enrolled in one at the moment, it makes sense to familiarize yourself with both an HDHP and an HSA today, ensuring your options down the line.

Maximizing Tax Advantages

HSAs offer triple tax advantages, which means that your HSA contributions are tax-deductible, the funds can be withdrawn tax-free (as long as you’re spending them on eligible medical expenses), and whatever you earn while investing in your HSA grows tax-free, too.

If you contribute the maximum amount ($4,150 for individuals and $8,300 for families), this account can also help lower your taxable income. 

If you can, you should contribute the full amount to your HSA each year, not only to take advantage of the money’s tax-free growth, but also to maximize your tax deduction. 

HSAs and Retirement

If you think that your HSA stops working for you once you hit retirement, not so fast! There are several benefits of having a well-funded HSA into your golden years. 

Once you hit age 65, you’re permitted to make withdrawals from your HSA for non-medical expenses. You’ll still pay taxes, but the 20% penalty fee you would have gotten for non-eligible-expense withdrawals before age 65 no longer applies. If you want to learn more around the specifics of using your HSA to complete your retirement plans, check out this post.

It’s also handy to have a large HSA as you get older because medical care will likely be one of your biggest expenses in retirement. It’s estimated that medical care for a couple in retirement will cost $285,000, not including long-term care. Ouch!

Boost Your Life Savings 

Experts suggest tucking away 15% of your take-home pay for retirement, usually in a 401(k) or IRA. But what if your HSA could also boost your retirement? Lucky for you, it can.

For example, let’s say you have enough money in your 401(k) to last you until age 74. Keep in mind, this number will be different for everyone, given their cost of living, geographic area, and healthcare costs. A well-funded HSA (invested, of course) jettisons you to age 80. And with life expectancy in the United States rising in at 78.6 years old, you’ll be glad you did. 

Unlike the use-it-or-lose-it rule governing a flexible spending account (FSA), whatever unused HSA-funds are hanging around in your account at year’s end will roll over into the next year. Compounded with the investment aspect of an HSA, you stand to build a nice little nest egg—a supplemental retirement account, if you will—to help improve your quality of life throughout retirement. Take a look at the graph below to see how an HSA far outlasts a 401(k) during retirement!

Another thing to consider: just because you have the funds sitting in your HSA doesn’t mean you need to use them for healthcare expenses, even the eligible ones. 

Carefully weigh the growth potential of your HSA against the cost in question. In some cases, it may make more sense to cover an expense out-of-pocket, rather than dipping into your HSA. Because if that money stays sitting there, it’ll grow tax-free, remember?

The Golden Years Await

Now you’ve begun to understand that an HSA can be a great vehicle for retirement savings! With the need for a very large nest egg for a comfortable retirement, your HSA savings could be just the thing to jettison you through your golden years.