Health Savings Accounts (HSA) were originally introduced in order to help individuals with high deductible health plans (HDHP) set aside money for their health care needs. With tax advantages, rollover capabilities, and potential employer contributions, HSAs became a great tool for individuals to prepare for the inevitable health care expense. Although these benefits have remained useful, individuals have now developed strategies to optimize contributions and withdrawals of this triple tax advantaged account in order to support their retirement goals and needs, namely expenses outside of their own healthcare. In this post, I will cover who qualifies for this type of account and the ways in which it can play an integral role in someone’s overall financial plan before and during retirement.
According to IRS Publication 969, in order to qualify for an HSA, an individual must:
- Be covered under a HDHP on the first day of the month
- Have no other health coverage, except what is permitted under other health coverage
- Not be enrolled in Medicare
- Not be claimed as a dependent on someone else’s tax return
Things to note include:
- According to the IRS and healthcare.gov (as of 2023), a HDHP is any plan with a deductible of at least $1,500 for an individual and $3,000 for a family. The maximum out of pocket limits are $7,500 for an individual and $15,000 for a family (for in network services only).
- According to IRS, “no other health coverage” exceptions include: “1. Liabilities incurred under workers’ compensation laws, tort liabilities, or liabilities related to ownership or use of property 2. Specific disease or illness 3. Fixed amount per day (or other period) of hospitalization 4. Insurance such as disability, dental, vision, long term care.”
- For 2023, individuals can contribute up to $3,850 and families $7,750. If employers contribute, you must reduce that from your own contributions to stay under the annual limit. At age 55, individuals can contribute an additional $1,000.
- The HSA is owned by the individual, never the employer.
Once you determine that you qualify, it is important to start understanding how an HSA can be of best value to help you meet and maintain your retirement goals.
Tax Benefits: An HSA is a triple tax advantaged account. This means that 1. contributions are tax deductible, 2.investment gains are tax exempt, and 3. withdrawals for qualified medical expenses are also tax exempt. For those who MUST use their HSA to float medical expenses, it helps to have such a tax favorable account to add pre tax income, allow growth, and withdraw for medical needs without the worry tax implications.
Roll Over, Investable Asset with Possible Employer Contributions: Some employers will contribute to your HSA yearly, regardless of how much you contribute yourself, and unused funds get rolled over year to year. Although some employer provided plans may require a minimal amount to be held in cash reserves, you are likely given freedom to invest a majority, if not all, of your HSA balance. For an induvial who prefers to optimize growth of their HSA account, investing account balances can benefit from long term, compound growth. It is incredible to see the progress of an HSA that has been properly invested and not depleted over time. If your employer does not offer an HSA plan, you are still able to open an account yourself. I have chosen to establish my HSA with Fidelity due to it being fee free and offering low-cost index funds to where I can invest my HSA balance.
Work Around for Tax Free Withdrawals of Non Qualified Medical Expenses: Lastly, where the HSA becomes most valuable as a retirement vehicle, is for those who are able to comfortably manage and pay out of pocket for medical expenses as they are incurred in pre-retirement years, while continuing to invest and grow their balances. This is because, according to the IRS, you may reimburse yourself from the HSA at ANY time for an out of pocket medical expense, even if the medical expense was incurred many years before. Thus, an eye exam paid out of pocket in 2023, can be reimbursed from an HSA in 2040, as long as HSA existed before the expense was incurred. This strategy can be extremely useful for those looking to make tax free withdrawals in retirement for any given expense, as long as the withdrawal amount equates to previously paid (out of pocket) medical expenses. The $400 paid out of pocket on contacts in 2023 can now be claimed and withdrawn from the HSA in 2040 and used towards upcoming travels, events, or unexpected repairs. By delaying withdrawals from your account, your account has benefitted from long term compounding and the ability to use withdrawals for other cash flow needs later in life.
Once you have reached 65, you are also eligible to use HSA withdrawals for Medicare Part B and D premiums (supplemental insurance not included) tax free. Lastly, if you decide to use your HSA funds at this point for nonqualified medical expenses (without a previous out of pocket qualified medical expense to match), you are no longer penalized; however, you must pay ordinary income taxes on these withdrawals.
Whether you plan to retire early or at an expected age, the HSA can play an integral role in your financial plan. HSAs are widely known as healthcare reimbursement accounts; however, their true value extends far beyond this benefit. When correctly funded, invested, and utilized, HSAs are arguably the most underrated retirement vehicles due to their distinct tax favorability, withdrawal versatility, and capability of exponential, long term growth.
Disclosure: This site may receive compensation from the companies whose products I review. This site is independently owned and the opinions expressed here are my own.