Is an HSA a good place for my retirement savings? – The crazy fool

Everyone knows about 401 (k) s and ARIs, but there is another way to save for retirement that is getting a lot of attention lately: Health Savings Accounts (HSA). Most people view HSAs as a cost-effective way to save money for future medical expenses, but they have much more to offer.

Take a closer look at how they work and how you can use an HSA to supplement your retirement savings.

Can I contribute to an HSA?

To be eligible for an HSA, your health insurance policy must be a high deductible health plan (HDHP). This is defined as a plan with a deductible of $ 1,350 or more for individuals or $ 2,700 or more for a family. Once you have subscribed to the plan, you can open an HSA account with your bank and start paying funds. If your employer offers the health insurance plan, your company can create an HSA as an employee benefit.

Single adults can contribute up to $ 3,500 to an HSA in 2019, while families can contribute up to $ 7,000. Adults aged 55 and over are eligible for $ 1,000 in additional catch-up contributions. These limits may change from year to year, as well as the minimum deductible of health insurance required to qualify for an HSA. It is important to check these limits each year to see if they have increased. You can contribute up to the annual HSA limit each year from the time you open the account until you become eligible for Medicare at the age of 65, provided you keep your high deductible health plan.

Any after-tax amount you contribute can be deducted from your taxable income for the year. If your employer's health plan has an HSA option, you may be able to pay pre-tax dollars directly to your HSA and your employer could match some of your contributions. However, the total contributions you and your employer make to your account can not exceed the annual contribution limits.

Some HSAs keep your money in cash while others allow you to invest in mutual funds or other investment products, as you would with a 401 (k) or an IRA , to accelerate the growth of your savings. If you choose to invest your HSA, consider allocating the funds in the same way as your 401 (k) and IRA funds to ensure that your investments match your risk tolerance and tolerance goals. at risk. You may need to save a certain amount before your bank lets you invest the money.

Unlike Flexible Spending Accounts (FSA), the money from your HSA account is transferred from year to year. So you keep it until you need to spend it. You can also take your HSA with you if you leave your current job, but you will not be able to make new contributions unless you keep your high deductible health plan.

What can HSA distributions serve?

You are authorized to receive distributions from your HSA at any age, provided you use it for eligible medical expenses – paying hospital bills, prescription drugs, specialist visits and other expenses medical.

And the best part is that you will not pay any taxes on these withdrawals. For this reason, it is a great place to keep money in case of emergency to help you cover the costs you incur if you are seriously injured or sick. You can also save money for planned medical expenses, such as pregnancy and childbirth, non-emergency surgeries, long-term care, and mental health or addictions treatments.

But HSAs have another benefit for the elderly that few people realize. Once you reach the age of 65, you will also be able to use your HSA funds for your non-medical expenses, although you will pay income tax on these withdrawals. If you are under 65, you can also make non-medical withdrawals, but you will have to pay a penalty of 20%, which makes it a rarely desirable option.

Another benefit for HSAs: Once you are 65, the HSA becomes similar to a traditional IRA or 401 (k), but unlike these retirement accounts, HSAs do not have the minimum required distribution ( MSY). The government requires you to start collecting these distributions on all retirement accounts, with the exception of the Roth IRAs, at the age of 70 and a half years to make sure that it will benefit you. 39, a tax reduction on your earnings. The amount you need to withdraw will depend on your age and the value of your retirement accounts. The problem with RMDs is that they may require you to withdraw more than you want, pushing your taxable income into a higher tax bracket. But not taking DMD is not an option unless you want to pay a 50% penalty on the amount you should have taken out.

You will not have to worry about that if you keep your money in an HSA. Your money can be carried forward for as long as you want, and distributions for eligible medical expenses will still be tax-free even after you can no longer make contributions to the account.

How to use HSAs strategically?

It's a good idea to contribute at least as much as your health insurance franchise to your HSA, even if you do not plan to use it as a retirement savings plan. This way, if unforeseen medical expenses occur, you can cover them without removing your credit card before the insurance is paid. However, for small medical expenses, you may prefer to pay out of pocket, letting your HSA savings continue. grow for bigger costs on the road.

An HSA can be a great supplement to your other retirement savings accounts, but you need to carefully evaluate the terms. If your account allows you to invest your money in mutual funds, it also charges expense ratios. These are annual fees that all shareholders pay and can hinder the growth of your money. Consult the prospectus of the funds in which you have invested to see how much you are paying in fees. If it accounts for more than 1% of your assets each year, your HSA account may not be the most effective retirement savings plan for you. Consider moving your money into more affordable investments, such as index funds, or not investing in your HSA funds at all and paying most of your retirement savings to a 401 (k) or IRA.

You can set up automatic deposits on your HSA account from your pay check if your employer allows it, or provide a certain dollar amount each month you want to contribute. Keep an eye on the contribution limits each year and do not exceed them, otherwise you will pay an income tax and excise tax of 6% on the excess.

With all the tax benefits, there is no reason not to open an HSA if you are entitled to it. But as with all your retirement savings accounts, you need to carefully evaluate the HSA to understand what you are getting and what the account can cost you.