For More Money in Retirement, Look to Your HSA

RetirementIRA, 401(k), HSA? You may be thinking that one of these is not like the others. But, Health Savings Accounts (HSAs) are more valuable than you may think. While most people tend to regard HSAs solely as a way to counter the rising costs of medical care, they can also become a money-smart tool for use in retirement.

In order to take advantage of an HSA during their retirement, account owners can build their resources during their working years in numerous ways:

HSAs can be completely tax-free: Account owners make pre-tax contributions (or tax-deductible if made outside of a payroll deduction) and earn tax-free interest and investment returns. Plus, if those dollars are used for qualified medical expenses, those are tax-free too.

Old dog, new trick: Rolling over isn’t just for your favorite pup. At the end of each plan year, there is no ‘use it or lose it’. Unused HSA funds stay put in your account and roll over to the next year. When you can afford it, it may behoove you to leave the HSA funds untouched and pay out of your wallet for out-of-pocket expenses such as copays or deductibles.

Playing catchup: If you were unable to max out your HSA contributions during the calendar year, you can play catchup as long as you do it before the April tax-filing deadline.

Getting older, getting wiser: For people covered only by a high deductible health plan, they can contribute up to $6,750 per year if they have a family, and $3,350 for singles. But there’s a $1,000 bonus for people over 55: they can contribute $7,750/family, $4,350/single. Keep in mind that employer contributions count toward the maximum limit, which you’ll have to account for when deciding how much to defer.

Over 65? No penalties: If you use your HSA funds for non-medical purchases and unqualified medical expenses, there’s a 20 percent tax penalty. However, once you turn 65 that penalty goes away.  While qualified medical expenses remain tax-free, other expenses will be taxed at the current rate instead of receiving the penalty, just like an IRA.

‘Til Death Do Us Part: Except with an HSA. Surviving spouses can use any remaining balance in the account and enjoy all the benefits. However, once both spouses are dead, any remaining beneficiaries will be taxed on the leftover amount after the deceased’s medical bills are settled.

Think an HSA is only for medical expenses? Think again.

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