Future Healthy: Never too early to plan for your retirement with your HSAs
As if HSAs aren't amazing enough - did you know you can use your HSA as part of your retirement plan?
That's right -- what's typically being used as a place to save up for medical costs can actually be used to save money for pretty much anything during your golden years. Think of it a special type of retirement account you can sock money into because you're enrolled in a high-deductible health plan (among other requirements).
A quick look at typical retirement accounts
The most common types of retirement accounts are the traditional IRA and 401k (or 403b if you work in nonprofit or for the government). You can make pre-tax contributions just like an HSA. The money in an IRA or 401k.403b can grow tax-free.
You do have to pay taxes on the money you withdraw from a traditional IRA or 401k, but you also get the benefit of the money growing tax-free when you made the contribution, plus you didn't have to pay money on your contributions. As in, if you put in $5,000 in you 401k, the IRS looks at it as if you didn't earn that amount-- and therefore you won't pay income tax on it.
There are also other accounts like the Roth IRA/401k, which gives you the ability to have tax free withdrawals. You do have to pay tax on that income up front, but the money grows tax-free. Once you reach the age of 59.5, you can take money out without the need to pay taxes.
While both types of accounts have its advantages, you can only contribute up to a certain amount each year. That's why using an HSA as part of your retirement plan will help you maximize the money you contribute.
Why the HSA rocks
Your HSA account may be able to provide the best of both worlds of a Roth IRA and a traditional IRA. In other words, you can have tax-free contributions, tax-free distributions on qualified expenses and even tax-free growth, all in one account.
You already know you can use the money for qualified medical expenses. That's where the tax-free withdrawals come in. You can delay taking the money out for the foreseeable future, as long as you maintain solid HSA records.
By the time you retire, you can take those qualified medical expenses and withdraw the money tax free. If you find that you have more medical needs as you get older, you can use that account specifically for that purpose.
The cool thing about an HSA is that you can use it like a traditional IRA after you reach 65. As in, you can withdraw the money to use for anything you want. Yes, you'll get taxed on that amount, but you won't incur any additional fees or penalties.
Ideally, you'll be withdrawing from your other retirement accounts first, and keep the HSA for medical expenses as much as possible. But since the contribution limit for an IRA is $5,500 ($6,500 if you're older than 50), think about how much an extra $3,450/$6,900 -- the current annual HSA contribution limits for those participating in a qualified health plan as single/family -- can help you with padding your retirement funds.
Some pitfalls to watch out for
If you have ongoing medical needs or find yourself in a situation where you do need to withdraw from your HSA, don't sacrifice your health now for the sake of extra retirement dollars later.
If possible, contribute to an HSA as much as you can afford to until age 65, or whenever you decide to retire. That way, you'll be able to maximize the amount you set aside for health expenses for when you're older and money in general for your retirement. With that said, we're not tax professionals and your best bet may be to check on future retirement goals with your financial or tax advisor.
Whether it's for covering medical expenses, or planning bigger investments, our Future Healthy column will help support your path to retirement, no matter where you are on the journey. And for the latest info about your health and financial wellness, be sure to check out our HSA Learning Center, and follow us on Facebook and Twitter.