A health savings account (HSA) is designed to help you cover health care costs through tax-advantaged savings. But an HSA can be more than simply a place to stash cash for today’s medical bills.
As you build your retirement plan , an HSA can be a key component. Here are some of the ways this type of account can provide a big boost to your golden years.
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1. It lowers your taxes in 3 ways
HSAs offer a triple tax advantage.
First, you can get a tax deduction in the year you make a contribution. The funds also grow tax-free within your account. Finally, you can withdraw the money tax-free now or in retirement to cover qualified medical expenses.
In short, it is possible to never pay taxes on this money. With such big tax advantages baked into this account, an HSA represents a solid way to strengthen your finances both now and in retirement.
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2. You won't have to make required minimum distributions
Many retirement accounts — including traditional IRAs and 401(k)s — mandate that you make required minimum distributions when you turn 73. That means you have to withdraw funds and pay taxes on them whether you need the money or not.
HSAs don’t have required minimum distributions. You can leave the funds to grow in your HSA untouched until you truly need to tap into the stockpile you have built.
3. It can help you to pay for health care costs
An HSA is intended to help savers put away money for health costs. Since it’s difficult to predict your own future health care costs, tucking away funds for this purpose is usually a good idea.
In the best-case scenario, you’ll remain healthy and allow the funds to grow for years to come.
If you decide to retire before you reach Medicare eligibility, the stockpile of HSA funds can help you cover medical expenses until you can tap into Medicare. And you can also use the money in retirement to pay for the many costs that Medicare does not cover.
For example, you can also use an HSA to cover copays, coinsurance, deductibles, and other medical costs.
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4. You can use the funds to pay Medicare premiums
Once you enroll in Medicare, you can no longer contribute new money to an HSA. However, you can still tap into the funds you saved prior to enrolling.
After you are eligible for Medicare, you can use the funds from your HSA to cover Medicare premiums. Eligible costs generally include Part B and Part D premiums, and Medicare Advantage premiums.
However, you cannot use an HSA to pay Medigap premiums.
5. You can use the funds to pay for long-term care
Long-term care can be expensive. If you need ongoing care, long-term care insurance often helps pick up those costs.
You can tap into your HSA to cover some of your long-term care insurance premiums if you pay for a “tax-qualified” long-term care insurance policy. Or, you can skip the insurance and use your HSA to pay for long-term care expenses directly.
6. It can help your spouse after you die
You can designate your spouse as the beneficiary of your HSA. This choice allows your spouse to inherit your account intact and enjoy the same benefits that you did from your HSA account.
If you don’t designate your spouse as the beneficiary of your HSA, the value of the HSA will become taxable to the beneficiary after your death.
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When you turn 65, you can withdraw funds from your IRA and use them for any purpose without paying a penalty.
For example, let’s say you want to go on a vacation or buy a new vehicle. You can pull funds out of your HSA after age 65 and use them penalty-free.
However, since you are not using the money for qualified medical expenses, you will have to pay taxes on the withdrawal.
8. It can be used as part of your estate plan
If you want to leave assets to a beneficiary who isn’t your spouse, you can do so by leaving your HSA as a part of your estate.
The catch is that most non-spouse beneficiaries will face a significant tax hit when inheriting your HSA.
Bottom line
An HSA is a useful tool to pay for medical expenses during your working years. However, savvy savers also know they can use an HSA to prepare for retirement .
If you are able to open an HSA and tuck away savings, you can reap benefits both now and during your golden years.
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