Did you know you can sell all or a portion of a life insurance policy, even term insurance?
(3 minute read)
A health savings account (HSA) is an account type invented to help consumers who have a high-deductible health plan save money that will specifically cover healthcare expenses. But in recent years, these accounts have also emerged as some of the most useful, popular, and non-traditional types of account for retirement savings. In 2018, the number of health savings accounts increased by 13%, to 25 million accounts, with the assets in those accounts increasing by 19%.
HSAs come with a triple tax benefit and are some of the only accounts where penalties for withdrawing money are reduced after age 65. Here’s what you need to know about using a health savings account for retirement planning and the benefits you will get from a health savings account during retirement.
Early Tax Benefits of a Health Savings Account
All the money that is saved in your HSA is tax-deductible. If your health insurance and HSA are currently provided through an employer, you will likely make these contributions through payroll before taxes are applied to your check. If you set up your own health savings account separate from your employer, you can deduct your contributions from your annual taxes.
It’s important to know there are contribution limits for a health savings account. If you have an individual health plan you can save as much as $3,550 a year, while those with a family plan can save $7,100. After age 55, each individual with an HSA can make an additional $1,000 “catch up” contribution, as long as the household’s total contributions don’t exceed $9,000. This can get tricky, so be sure to talk with a financial professional if you want to be sure your contributions don’t put you at risk.
In the event you need to pay a qualifying healthcare expense like a deductible, medical bill, or the cost of prescriptions, the HSA can be used for those costs, meaning you pay them tax-free. Yes, not only is the money not taxed when you deposit the savings, it also isn’t taxed when you spend it as long as you use it correctly. A full list and detailed description of qualifying HSA expenses is available from the IRS.
Investment Strategies for a Health Savings Account
Another tax benefit of the health savings account is that if you invest the money that you have saved, the earnings on those investments are not taxed. For those who are still years from retirement, it may be a smart move to leave some of the account balance in cash to cover expenses and establish a separate investment account with the rest of the savings. Don’t worry, you can still use all the savings at any time if your costs are higher than expected.
High-deductible health plans usually have deductibles starting in the $1,300 range for individuals or $2,600 for a family. Some deductibles are as high as $4,000. Remember that covering these costs is part of the primary intention of the account.
If you have a nice balance of savings, some experts advise paying the medical expenses you can afford out-of-pocket but keeping the receipts and documentation. Then, in the event you need cash for a non-medical emergency, you can reimburse yourself for those qualifying expenses and still get the money you need. This allows you to invest the maximum amount to grow tax-free, while still having the savings safety net when you need it. This strategy would work for anyone, of any age.
Otherwise, if you use the money in the account to pay a non-qualified expense directly, you would be subject to a 20% tax penalty on the amount you used, in addition to income tax.
Drawing from an HSA in Retirement
Once you hit age 65, a few things will change about your health savings account. Since you will now be eligible for Medicare, you are no longer able to make contributions to the HSA. The money in the account can still be invested, and you can still use the savings, but you won’t be able to add to the account. This is because you now have a health insurance option that is not a high deductible plan. However, unlike many other savings accounts, you are never required to take a minimum distribution from an HSA.
The main way the power of your HSA increases after age 65 is you are no longer subject to the 20% penalty for non-qualified expenses. You will pay income tax on the amounts you use for non-qualified expenses, but you can use the money in the HSA to cover any expenses you want. This is why these accounts are such popular options for retirement planning. Unlike more traditional retirement accounts, you can still use the savings before retirement when they are needed for your health and wellness. And, when you reach retirement, all the saving and investing you have done suddenly becomes a new source of income.
If you aren’t part of a high-deductible health plan, the costs of switching to get an HSA are likely to outweigh the benefits. But if you already have a health savings account, maxing out your contribution is a great strategy to protect yourself with savings today and in the future.
Did you know you can sell all or a portion of a life insurance policy, even term insurance? Selling an unwanted life insurance policy is no different than selling your car, home or any other valuable asset that will create immediate cash. Contact us today to learn more.
Life Settlement Advisors