It’s all too easy to get caught up in ways to save for retirement, but it's also important to keep in mind ways to reduce costs during retirement. With the rising costs of health care and the unpredictability of your future health needs, it’s imperative to include a plan for covering medical expenses during retirement. A Health Savings Account, or HSA, has many benefits that can help with offsetting health-related costs, not to mention all of the tax advantages of the account.
Most high deductible health plans offer an HSA component, and some employers even contribute to employee accounts. There is no time limit for distribution of the funds, and, unlike a tradition flexible spending account (FSA), any money in an HSA is yours, even if you leave employment.
As mentioned above, an HSA comes with a triple tax advantage:
- Contributions are made using pretax dollars.
- Funds grow tax free.
- Distributions for qualified medical expenses are not taxed.
Additionally, because HSA contributions are deducted from your gross income, the result is lower federal income taxes. There are contribution limits; however, and they are listed for 2016 as follows:
- $3,350 maximum contribution for an individual (The maximum contribution for an individual will increase to $3,400 for 2017.)
- $6,750 maximum contribution for a family (No increase to the maximum contribution for a family is scheduled for 2017.)
- If you’re 55 and older, you are allowed to make an additional $1,000 catch-up contribution
Withdrawing funds for non-medical expenses can result in a penalty tax and are subject to income tax. People aged 65 or older can withdraw funds for non-medical expenses and avoid the penalty tax, although they would still be subject to income tax. It should also be noted that a high deductible health plan is not for everyone; only you can decide what type of health plan best suits your needs and lifestyle. For more information on Health Savings Accounts and the IRS definition of a high deductible health plan, please read https://www.irs.gov/pub/irs-drop/rp-15-30.pdf.
As always, if you have questions regarding your financial and retirement planning, feel free to reach out to us.
David Hanson & Carl Hanson, CFP®