What popped into your head when you read that? Probably your company’s 401(k) plan. Or maybe a type of Individual Retirement Account (IRA), especially if you’re self-employed.
But did you know there’s another account out there that can be used for retirement savings?
It’s true. It’s called the Health Savings Account (HSA), and it is one of my very favorite tools when it comes to saving for the future.
What is a Health Savings Account?
The HSA was signed into law in 2003 as part of the Medicare Prescription Drug, Improvement, and Modernization Act. It’s an account that allows you to set aside money for qualified healthcare expenses.
The good news is you receive a tax deduction for your contribution to the account. Plus, the money grows tax-free, as long as you use it for those qualified costs.
So the HSA is an account that lets you use tax-free money to pay some of your expenses.
On top of that, the HSA basically acts like a Traditional IRA (with some tweaks).
If you get to age 65 and want to use some of the money for non-qualified expenses, you can do so without paying a 20 percent penalty. You just withdraw like you would in any Traditional IRA. Then, pay income tax on the withdrawal amount.
It’s a pretty cool account and one that I use for long-term retirement planning.
Who’s eligible for a Health Savings Account?
As with many tax-advantaged accounts, there are some eligibility requirements for getting an HSA.
So before you rush out and try to open one, make sure you qualify. The good news is it’s not too difficult.
You must be enrolled in a high-deductible health plan.
For 2016, this is a plan that has a deductible of at least $1,300 for single coverage and $2,600 for family coverage.
Check to see if a high-deductible plan might work for your situation.
You cannot be covered by another health plan.
You must only be covered by the high-deductible health plan. There are some limited exceptions, but this is the general rule.
You cannot be enrolled in Medicare.
Medicare recipients are not eligible.
Someone else cannot be claiming you as a dependent on their tax return.
Make sure you’re in the clear before signing up for an HSA.
Additionally, there aren’t income limitations for the HSA. So as long as you meet the eligibility requirements, you can open an account.
What’s more, some employers actually offer matching contributions for your HSA and provide an account. In other cases, you might need to go to your bank to open an HSA.
My HSA is at my local bank, and opening an account was pretty straightforward.
Simply bring documentation that you meet the eligibility requirements and you can open an account. I brought a copy of my health plan and my tax return to the bank.
If your employer opens an HSA for you, they already have everything needed to verify your eligibility. So there should be no hiccups there.
How to use your Health Savings Account
Once you open your HSA, you can start using it.
However, the first thing you should do is double-check the contribution limits. Similar to retirement plans, the Internal Revenue Service (IRS) limits how much you can contribute. And these limits can change periodically.
The money you set aside in your HSA can be used to help pay for health care costs at any time. As long as you use the money for qualified expenses, there are no penalties for withdrawing it.
You can access your HSA using a debit card, or you can pay with cash or use another form of payment and reimburse yourself. Just save the receipts for tax time.
Be careful, though. If you withdraw money from your HSA and use it for non-qualified costs, you will have to pay income tax on the earnings and a 20 percent IRS penalty if you are younger than 65.
Here are some of the items that you can pay for using a Health Savings Account:
- Dental care
- Eye care (including glasses and contacts)
- Physical therapy
- Doctor visits
- Hearing aids and batteries
- Nursing services
- Fertility treatment
There are plenty of other costs covered as well. You can get more information about what’s covered by checking out Publication 502, Medical and Dental Expenses from the IRS.
Using the HSA for retirement
I use my HSA as a retirement health account. I make regular contributions and let the money sit.
Therefore, rather than use money contributed to the HSA now, I use “regular” money to pay health care costs today. Essentially, I plan to let the money accumulate in my HSA until I am ready for retirement.
Last year Fidelity estimated that a couple can expect to pay $245,000 for health care throughout retirement.
That’s why I like to max out my HSA contributions when I can so I can build a good cushion for healthcare costs later. My other tax-advantaged retirement accounts can be used for living expenses and other retirement costs.
Another perk of the HSA is that you can actually invest some of the money.
As with most long-term investing solutions for retirement, I find that index funds work well for me. Make sure you review your own situation and decide what might work best for you.
It’s important to understand that the HSA isn’t right for everyone.
A high-deductible plan might not work well for you if you have small children or a chronic health condition. Or, the cost of paying out-of-pocket until you reach your deductible might be too high for your budget.
Run the numbers yourself to see if the benefits of an HSA outweigh the costs.
With the HSA, you gain another tax-advantaged account that can be used to help you save for the future.
Therefore, carefully consider whether or not this might work for you. I find that coordinating my HSA with my other retirement accounts offers me one more way to grow my money efficiently over time.
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
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2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
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