5 Ways HSAs Can Bolster Your Retirement Plan

Written on March 24, 2021.

Health Savings Accounts Offer Several Benefits to Your Retirement Strategy

If you’re maxing out your 401(k) and IRA contributions, you’re likely on the road to a comfortable retirement. If you’re saving in taxable accounts, too, you’re even further ahead of the game. However, you may be missing out on an incredibly tax-efficient savings vehicle. If you truly want to bolster your retirement plan, it’s time to look into a health savings account (HSA).

Health savings accounts are the only option for triple-tax savings, meaning you can contribute pre-tax dollars, pay no taxes on earnings, and withdraw money tax-free now or in retirement as long as it’s used for qualified medical expenses. Simply put, HSAs go to work for you in three ways and provide the ultimate tax-efficiency. Read on for five ways you can fortify your retirement plan by using an HSA.

1. Utilize the Triple-Tax Advantage

The first thing to know is that, in order to utilize an HSA and receive the triple-tax benefits, you have to be enrolled in an HSA-eligible health insurance plan, either at work or through the private marketplace. These are typically high-deductible plans, and many people use their HSA funds to cover their out-of-pocket costs in the present. However, if you can manage to pay those costs with personal savings, you can use your health savings account to supercharge your retirement savings and take full advantage of its triple-tax-free nature.

Here’s how: Unlike most flexible spending accounts, the money you contribute to your HSA can roll over from year to year. You can earn interest on it, and you can even take it with you if you change employers or retire. The contribution limits set by the IRS for 2021 are $3,600 for individual coverage and $7,200 for family coverage. If you’re 55 or older, you can also make a $1,000 catch-up contribution. If you really want the power of the HSA to work for you, contribute the maximums and don’t tap into your funds unless absolutely necessary. Rather, let them grow until you retire.

2. Set Aside Savings Specifically for Health Care

Most people will face a plethora of health care expenses in the future. This includes medical procedures, hospital bills, prescription drugs, or even home health care or nursing home costs. It’s impossible to predict if or when these types of expenses may hit, or to know how much they’ll cost you. This is why it is prudent to build a nest egg specifically to cover future health care expenses.

Of course, Medicare will cover some of your health costs once you turn 65, but that coverage is limited. And with estimates hovering around $295,000 for what the average couple will spend on health care in retirement, it will be necessary to plan ahead. Funding a health savings account means having an accessible bucket of money that you can withdraw from tax-free to cover your health care costs in retirement. (Note: not every expense will be a qualified medical expense, so be sure to check the IRS list.)

3. Consider Investing Your HSA Dollars

Health care costs are continuing to rise, so even the estimates above may not cover your health care needs in retirement. For this reason, it may be wise to invest all or some of your HSA contributions. Once you reach the $1,000 threshold in your HSA, you can begin investing in mutual funds, stocks, and bonds. The potential for tax-free growth means bolstering your retirement savings even further, and you can choose your level of risk. Some people, for instance, match their HSA investment risk level with that of their overall portfolio, while others choose to be more conservative in their HSA investment strategy.

4. Plan to Use Your Health Savings Account (HSA) in Retirement

You’ll always have the option to use your contributed funds to cover qualified medical expenses now and in the future. However, there are a few additional ways you can use your HSA money once you retire.

Bridging to Medicare

Medicare eligibility begins at age 65 and, if you retire before that time, you may need help bridging the gap until you become eligible. Although you cannot typically use HSAs to pay private health insurance premiums, there are two exceptions: paying for an employer-sponsored health care plan under COBRA, and paying premiums while you are receiving unemployment compensation. Both could be helpful if you lose your job or you decide to stop working before age 65.

Paying Medicare Premiums

You are permitted to use your HSA to pay for your Medicare premiums for both Part B and Part D. However, you may not use it to pay supplemental policy premiums.

Helping to Cover Long-Term Care

HSAs can also be used to cover a portion of the cost of a long-term care insurance policy. You are permitted to do this at any age, but the amount you’re able to use increases as you age.

Paying for Other Expenses

Remember all the qualified medical expenses you need to pay attention to before age 65? Once you reach this milestone birthday, you can use your HSA dollars to pay for any nonqualified medical expenses, too. (For example, you can buy that boat you’ve always dreamed of!) However, you’ll have to pay state and federal taxes on those distributions.

5. Use Your HSA in Your Estate Plan

It’s possible that you’ll get lucky and have lower than average medical expenses in retirement. It’s also possible that you won’t live as long as you hope to. In either case, you will be able to leave your HSA funds to your heirs. Note that the rules are complicated, so it’s important to consult with an estate planning attorney. However, there are three general categories to consider when you determine how your HSA assets are treated upon your death:

Spouse as Designated Beneficiary

In this case, the HSA will simply be treated as your spouse’s after your death. The account will receive the same triple-tax-free treatment.

Spouse is NOT the Designated Beneficiary

If you don’t name a spouse, the account will discontinue being a health savings account. Your beneficiary will pay taxes on the fair market value of the account in the year you pass away.

Your Estate is the Beneficiary

The fair market value of your HSA will be included on your final income tax return. It will likely become a probate asset, which could add time and complication. However, if you don’t have a surviving spouse, you may decide to plan with tax-efficiency in mind. In that case, naming your estate the beneficiary could be the right option for you, especially if your estate is in a lower tax bracket than your intended beneficiary.

Final Thoughts on Using an HSA to Bolster Your Retirement Plan

When it comes to planning for a comfortable retirement, it’s important not to overlook tools that could enhance your tax efficiency and your savings. Health Savings Accounts offer distinct advantages, most especially triple-tax-free treatment if you’re savvy about how you use them.

If you’d like to further fortify your retirement, an HSA is an option you should consider. If you’re unsure whether it’s right for you, or you have other questions about your retirement plan, please contact us today. At Paces Ferry, our clients are at the center of everything we do. We succeed only when you’re able to meet your goals at each phase of your financial life, and we provide the highest level of support along the way. Schedule your complimentary call with us today to learn more about our wealth management and retirement planning services. We look forward to hearing from you!

Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.