Retirement uses of Health Savings Accounts

Health Savings Accounts (HSA) are tax advantaged accounts that can be used to pay for qualified medical expenses. They are set up to be used in tandem with a HSA qualified medical insurance plan, which typically are referred to as high deductible. Often times the phrase ‘triple tax free’ is heard when discussing HSA’s, what does that mean? Any money contributed to an HSA is done so on a pretax basis, before the money gets taxed. While in the account, the money can potential grow tax deferred, and when the funds are used to pay for qualified medical expenses the withdrawal is tax free.

The annual limits in 2020 for contributions to an HSA are $3600 for someone using single coverage or $7200 for someone using family coverage for their medical plan. In addition, if someone is 55 years or older, they can also make an extra $1,000 contribution annually.  Sometimes employers will also make a company contribution to an employee’s HSA account to help support the savings efforts.  Unlike flexible spending accounts (FSA), there is no use it or lose it provision for HSA monies. Anything not used in a given year can remain in the account, and used at any time in the future. Any excess funds that someone has may be invested if they choose.

While one of the main purposes of having and using an HSA is to pay for medical expenses during one’s working years, they can also be helpful in retirement as well. HSA’s can be used to pay for Medicare costs such as part B or part D premiums. They cannot however be used to pay for a supplemental plan, or Medigap coverage. If someone is 65 or older and still able to access an employer sponsored health plan, those costs can be paid for with an HSA. Another use for HSA money in retirement, is to pay for tax qualified Long Term Care insurance premiums. There is an annual limit as to how much can be used to pay for this each year, based on one’s age. This limit increases as someone gets older.  Finally, once age 65 is attained, an HSA may be used for anything other than medical expenses. Under this scenario, there may be taxes owed on the withdrawal, much like taking money from a tax deferred 401K or IRA.

In conclusion, an HSA can be helpful shorter term to pay for medical costs, but it can also serve as another powerful saving tool for people leading up to retirement. It can be another arrow in the quiver when it comes time to build a retirement income plan.