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 traditional 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 pre-tax 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 2021 as follows:
- $3,600 maximum contribution for an individual
- $7,200 maximum contribution for a family
- If you are 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 more here: 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.