Can a Health Savings Account Help You Retire Comfortably?

Health Savings Account

Retirement account.

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:

  • Co-pays
  • Dental care
  • Eye care (including glasses and contacts)
  • Physical therapy
  • Doctor visits
  • Hearing aids and batteries
  • Prescriptions
  • 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.

Once your HSA balance reaches $2,000, you can invest the money above that threshold in whatever you want. However, you do have to be aware of the risk involved.

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.

Final words

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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