Youve probably heard of health savings accounts, or HSAs.
Think of it like a 401(k) for health care costs.
But first, heres a quick rundown of how HSAs work, including tax benefits and other key advantages.
Not sure what counts as a qualified medical expense? Usethis publicationfrom the Internal Revenue Service to see what qualifies.
What is a Health Savings Account?
You not your employer or insurance company own and control the funds in your HSA.
Probably not as good as youd like.
It always seems like an uphill battle to build (and keep) a decent amount in savings.
But what if your car breaks down, or you have a sudden medical bill?
Ask one of these companies to help…
The company estimates that almost 1 in 5 Americans in their 30s has a health savings account.
Did you know?
Contribution limits also include employer contributions.
Theres an additional $1,000 catch-up contribution for people ages 55 and over.
Each year, you decide how much to contribute to your HSA account, up to these limits.
If you have an HSA through an employer, you might set up automatic contributions from your paycheck.
You cant continue to make HSA contributions if youre no longer covered under a qualifying high-deductible health plan.
Theres a 20% penalty if you withdraw money from an HSA for non-qualified medical expenses before age 65.
Youll also pay income tax on these non-qualified withdrawals.
What Are the Tax Benefits of an HSA?
A health savings account offers several attractive tax benefits.
HSAs are said to have a triple tax advantage:
Many people contribute to an HSA via payroll deductions.
Many HSAs let you invest your money in stocks, bonds, mutual funds and ETFs.
However, few people take advantage of this unique investment strategy to maximize their retirement tax savings.
The rest 91% held their full balance in cash.
Some HSA providers offer more and better investment options than others.
Your workplace HSA may not be great.
If thats the case, try shopping around to find a better HSA provider elsewhere.
As we age, medical expenses increase quickly.
Plus, youll benefit from significant tax savings along the way.
Here are four ways your HSA can be used:
1.
Health Savings Accounts Can Serve as a Bridge to Medicare for Early Retirees
Is early retirement in your future?
You might want to consider an HSA.
Your premiums will be higher because youre over age 45.
To bridge the gap between early retirement and Medicare, consider opening an HSA while youre young.
you might use HSA money to cover your deductible and copays.
Your HSA can pay for Medicare premiums, deductibles, copays and coinsurance.
This can really help you save money down the road.
(However, HSA funds cant be used to pay for Medigap supplemental insurance premiums.)
In other words, a distribution doesnt have to pay for current medical expenses to be tax free.
This way you’re able to use your HSA balance to reimburse yourself for those earlier medical costs.
Paying for long-term care is a major financial challenge for many families.
A well-funded HSA can help.
This is especially helpful since Medicare doesnt cover extended nursing home stays or adult day care.
HSAs can also be a smart way to pass down money to your spouse after you die.
Plus the transfer of ownership is completed free of probate.
And they both offer tax advantages.
At that point, youll pay tax on the withdrawal.
If youre younger than 59.5 years old, youll also face a 10% penalty.
However, youll face a 20% penalty for non-medical withdrawals from an HSA before age 65.
Annual contribution limits are another big difference between HSAs and retirement accounts.
Both 401(k)s and HSAs allow an additional catch-up contribution for people 55 and older.
Is an HSA Retirement Strategy Right for You?
Using an HSA to save for retirement isnt right for everyone.
Many people are hesitant to enroll in HDHPs because they worry about affording future or current medical costs.
Annual out-of-pocket expenses can run as high as $7,050 for individual coverage or $14,100 for family coverage.
Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.
(Can you sense my millennial sarcasm there?)
You know which ones were talking about: rent, utilities, cell phone bill, insurance, groceries…
