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How to use your HSA as a retirement plan

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Using your Health Savings Account (HSA) can be a smart move to maximize your retirement savings. HSAs can not only cover current medical expenses but can also serve as a supplementary retirement plan like 401(k)s or IRAs. Here’s what you need to know about HSAs and how they can enhance your retirement savings.

What is an HSA and how does it work?

If you have a high-deductible health plan, you can use HSAs to cover medical expenses. To be eligible for an HSA, your health plan’s annual deductible must not be lower than $1,500 for an individual or $3,000 for a family in 2023. In 2024, these amounts will be $1,600 and $3,200, respectively.

HSAs are savings accounts that can be used to pay for medical expenses. You or your employer can put money into the account, which can be invested and will grow tax-free. You can withdraw money from the account tax-free as long as it is used for qualified medical expenses. This makes HSAs a savings tool that offers triple tax advantages, according to experts.

For the years 2023 and 2024, the maximum amount you can contribute to an HSA is $3,850 for individuals and $7,750 for families in 2023, and $4,150 for individuals and $8,300 for families in 2024. If you don’t use any of the money for medical expenses during the year, you can leave it in the account to earn interest without having to withdraw it.

Using an HSA as an additional retirement plan

You can use an HSA not only for medical expenses but also as a means to save for retirement. Upon reaching age 65, funds from an HSA can be withdrawn for any purpose. However, withdrawals not used for qualified medical expenses are subject to ordinary income taxes.

Your HSA works much like a 401(k) or an IRA. You can get tax deductions for contributions, and the money can grow tax-free until retirement. Although the amount you can contribute to an HSA is lower than that of a 401(k) or an IRA, it is still helpful for your retirement planning. HSAs offer catch-up contributions starting at age 55, with an additional $1,000 contribution allowed.

If you withdraw money before the age of 65 and use it for expenses that don’t qualify, you will be charged a penalty of 20 percent.

How to invest your HSA

To ensure you have enough funds to pay for medical expenses in the next few years, it’s best to adopt a conservative investment approach for your HSA. Since the primary purpose of this money is to cover your high-deductible health plan costs, investing in high-risk options could lead to inadequate funds when you need them. It is recommended to always keep a portion of your HSA funds in low-risk investments such as cash or money-market funds. This will help you manage your funds effectively.

Once you have saved enough to cover your expected expenses for a few years, you can consider treating your HSA like a retirement account. You can create a portfolio of stocks and bonds by using mutual funds or ETFs. Index funds are a popular choice among investors because they provide diversified market exposure at a low cost. Investing your HSA in individual stocks with some providers is possible, but be aware that more risks are involved. Make sure you research each holding carefully before investing.

Bottom line

Saving money in a Health Savings Account (HSA) can be beneficial for future healthcare expenses and retirement. If you use the funds for qualified medical expenses, you won’t have to pay taxes on withdrawals at any age. However, after turning 65, you can use the money for any reason, but you’ll need to pay taxes on withdrawals for non-medical expenses. This means that an HSA can work like a traditional retirement plan, such as a 401(k) or IRA, and help you achieve your retirement goals.

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