Health Savings Accounts (HSAs) are commonly used to help with medical costs by allowing account holders to contribute pre-tax dollars for qualified expenses. However, some people are also using HSAs strategically in their retirement planning. By treating the HSA like another IRA account, individuals can contribute funds year over year and potentially earn returns on investments, increasing the overall balance. Contributions are made with pre-tax dollars, and there are contribution limits based on filing status, with catch-up contributions available for those age 55 and older.
One of the key benefits of HSAs is that contributions are made with pre-tax dollars, and eligible distributions are taken tax-free. The list of eligible expenses is comprehensive and expanding with each new legislation, covering a wide range of medical costs. While qualified distributions are tax-free at any time, non-qualified withdrawals before age 65 incur a 20% tax penalty on top of being taxed as regular income based on ordinary tax rates. Additionally, there is no requirement to use the funds in the year they are contributed, allowing for flexibility in distribution timing.
For those considering retirement before age 65, using HSAs strategically can be beneficial. By holding eligible expenses for reimbursement after retirement has begun but before reaching age 65, funds can be used in early retirement alongside non-retirement account savings. This strategy can also facilitate Roth Conversions by moving money from traditional IRAs or 401(K)s into Roth IRAs without entering a higher tax bracket. Even after age 65, Roth Conversions can still be utilized as a tax planning tool, as HSA withdrawals are then allowed penalty-free, although non-eligible withdrawals are taxed as ordinary income.
If retirement before age 65 is not a consideration, contributing to an HSA may still be advantageous as long as Social Security and Medicare benefits are not being received. By delaying retirement to age 65 or later, Social Security income benefits can be maximized, and Medicare enrollment can be delayed without penalties by continuing to work and being insured under a current job-based plan. However, navigating the complexities of HSA benefits alongside retirement planning, tax planning, Social Security, and Medicare can be confusing, and consulting with financial industry professionals for personalized advice is crucial for successful financial planning and execution. Each individual’s financial needs are unique, and tailored guidance is essential for effective planning.
