Using an HSA to Supercharge Retirement Savings

By Craig Pellet, CPA

Health Savings Accounts (HSAs) were originally conceived to help Americans with low-cost insurance pay for healthcare. However, they may be better used as a method for retirement savings, better even than IRAs and 401ks. That’s because of a triple tax benefit: 1) deductible contributions, 2) tax-free growth, and 3) potentially tax-free distributions.

You can read more about the basics of HSAs here: https://www.johnschachter.com/executives-and-investors/health-savings-accounts

Here’s how to make this strategy work for you.

An HAS must be paired with a high-deductible health plan. Generally, this is a plan with a deductible of $1,600 for single coverage, or $3,200 for family coverage in 2024. There are other requirements, so check with your health insurance provider to confirm if your plan is HSA-eligible. If it isn’t, check with your employer to see if they offer a high-deductible health plan. Or, if you don’t get insurance from your employer, review your options on the marketplace during the next open enrollment period.

Open an HSA at a brokerage firm (Fidelity, for example), or other provider that allows you to invest your contributions in securities. Since you’ll be investing for the long haul, banks offering low interest rates on HSA contributions are a bad choice.

Once you are on the correct insurance plan, you can fund your HSA annually, just like an IRA. You even have until April 15th of the following year to make your contribution. Contribution limits for 2024 are $4,150 for single coverage, and $8,300 for family coverage. These limits are adjusted for inflation every year. Contributions you make are tax deductible, regardless of your income. Be sure to invest your contributions appropriately and remember that investment returns inside your HSA are tax-free.

You can use your HSA to pay your medical expenses currently. However, the better long-term retirement savings strategy is to leave your HSA funds alone and pay for medical care from other funds. There is no requirement to reimburse yourself for medical spending in the same year. Rather, keep track of your medical bills. You can reimburse yourself for those costs in retirement. Doing so will be a tax-free disbursement from your HSA.

Once you are covered by Medicare, you generally are not allowed to make contributions to an HSA. But accumulated funds can still be used to pay for medical expenses incurred in retirement. Distributions used to pay for medical care are tax-free, even when on Medicare. Distributions in excess of accumulated and current unreimbursed medical expenses are subject to income tax, but no penalty once you reach age 65. So even if you don’t track medical expenses, or have any medical expenses in retirement, an HSA is just as good as another 401k.

The triple tax benefit of deductible contributions, tax-free growth, and tax-free distributions makes HSAs a powerful tool for retirement savings.

At John Schachter + Associates we help our clients take advantage of HSA strategies. Talk to us. Let us know how we can help you!