If you’re hoping to build retirement wealth in a health savings account (HSA), it helps to have a game plan. There’s a growing buzz and excitement around HSAs. HSAs have a triple tax advantage. Contributions are tax-deductible, typically grow tax-free, and can be withdrawn without incurring taxes as long as you use them for qualified medical expenses. To use an HSA, you must be enrolled in a qualifying high-deductible health insurance plan. Here are five strategies to make the most of an HSA.
Start by age 50
If you haven’t been able to get an earlier start, age 50 is a good point to begin focusing on using your HSA for retirement savings because you’re typically in your peak earning years and past the juggling of big family expenses such as college tuition. If you can contribute to an HSA prior to age 50, by all means do so.
Maximize contributions
If you’re married, split your HSA savings into two accounts, with money in both your name and your spouse’s. You will still be limited to the maximum annual family contribution (currently $6,750), but then each spouse can make an annual $1,000 catch-up contribution once they reach age 55.
Workers who have access to an HSA, as well as a 401(k), may want to strategize which account they focus on first. Given the triple tax advantage of HSAs, in many cases, it makes sense to set aside just enough in your 401(k) to get the full match, and then fund your HSA fully before circling back to top off your 401(k).
Invest
HSA contributions often default into a money market, but funds intended as long-term retirement savings should be invested as such. A small but growing number of consumers are investing in their HSAs. Compare investment options and fees at different providers. You can choose whatever provider you want, although if your employer provides a match, it may only do so with its preferred partner.
Avoid dipping into savings
This is the tough part. If you can, pay for all current health expenditures out of pocket in order to save as much as you can in the HSA. This gives you a balance to roll over for future years and invest. Save those receipts though. There’s no requirement that you claim medical expenses in the year they occur; you can make a tax-free withdrawal even years later in retirement.
This can really work with a little bit of planning. A lot of times, it is the retirement years when health-care costs will be the greatest.
Mind retirement decisions
Under current rules, once you enroll in Medicare you can no longer fund your HSA. Keep that in mind as you approach age 65. Even if you’re still working, you may be required to sign up for Medicare (with your employer’s plan as secondary coverage), depending on the size of your employer and the kind of health plan you’re on. Claiming Social Security also by default enrolls you in Medicare Part A. Delay these enrollments if you can, or at least plan your HSA contributions accordingly.
For questions on your HSAs, always consult a qualified Certified Public Accountant. Submitted by: Dennis Gallant, Senior Manager, Tax Services, Thomas Howell Ferguson P.A. CPAs, (850) 688-8100, dgallant@thf-cpa.com
