Health Savings Accounts (HSAs) are tax-advantaged savings vehicles for funding health care expenses not covered by insurance. And for those in relatively good health, they also may serve as attractive retirement savings vehicles.
Advantages of an HSA
First and foremost, HSAs are tax-advantaged accounts. Contributions are made on a pre-tax basis, lowering your taxable income, and withdrawals are also tax-free when used to pay for qualified unreimbursed medical expenses. You can also invest HSA funds and enjoy tax-free growth potential. That's a triple-tax advantage.
Importantly, any unused HSA funds rollover from year-to-year, so there is no use-it or lose-it penalty. Employees can also rollover and consolidate their HSA accounts if they switch employers. So, save those funds for a rainy day, or let them grow and become part of your retirement strategy. It’s up to you.
What can HSA funds be spent on?
According to the IRS, HSA funds can be used for “qualified medical expenses”. In practical terms, the definition is wide-ranging. Funds can be used for doctor visits, hospital services, prescription drugs, eye exams, prescription eyeglasses, contacts, dental work, hearing aids, fertility treatment, chiropractors, and much more. For a full list of qualifying medical expenses, please see 2023 Publication 502 (irs.gov).
Eligibility and Contribution Limits
To be eligible to contribute, an individual must be covered by a high-deductible health plan (HDHP). In 2024, an HDHP must have a deductible of at least $1,600 for individual coverage or $3,200 for family coverage. For 2024, you can contribute up to $4,150 to an HSA, $8,300 if you have family coverage (plus an additional $1,000 if you'll be 55 or older this year).
HSA Implications at Retirement
Any funds you don't need for medical expenses will continue to grow on a tax-deferred basis, providing a valuable supplement to your other retirement accounts. In general, once you reach age 65, you can use your HSA funds to pay for anything. However, amounts spent that aren’t for qualified medical expenses will be subject to state and federal taxes, but not subject to a penalty.
Contact the office with questions about adding an HSA to your plans for retirement.