Medical care is one of the highest expenses in retirement. There is a way for you to save funds for these costs with a triple tax benefit. You do not get taxed on the money you contribute to your Health Savings Account (HSA), on the money you withdraw from it to pay approved medical expenses, or on the earnings the account generates. You also do not have to use the money in the account, until you choose to do so.
Do not confuse Health Savings Accounts (HSAs) with health care flexible spending accounts (FSAs). The two main differences between HSAs and FSAs are:
- You can keep thousands of dollars in an HSA for years, even decades. You cannot do that with an FSA.
- Unlike an FSA, you can invest the money in your HSA into mutual funds, so the account has a possibility for long-term growth and earnings.
HSAs in a Nutshell
You cannot get an HSA account as a stand-alone plan. You have to enroll in a high-deductible health plan that is eligible for HSA accounts. As of 2019, a high-deductible is at least $1,350 for individual coverage and $2,750 for family plans. Once you enroll in an eligible high-deductible health plan, here is what you need to know:
- The contribution limit into your HSA is $3,450 in 2019 (combined contributions from you and your employer) for an individual plan and $6,850 for a family plan. If you are 55 or older, you can put an extra $1,000 into your account this year. Covered spouses can add an additional $1,000 to their accounts.
- You usually cannot have both an FSA and an HSA.
- Your contributions to your has, have to stop when you enroll in Medicare – any kind of Medicare package. The HSA funds can pay your Medicare premiums, but not your Medigap coverage.
- If your employer does not arrange an HSA provider, you can open an HSA at the provider or your choice. Fees vary, so comparison shop for the best rates. Optum Bank and HealthSavings Administrators are two well-known HSA providers.
- You do not have to leave the money in your HSA account. You can pay current approved medical expenses with your HSA account.
HSAs Are Not for Everyone
HSA accounts have unmatched tax savings potential, but these accounts are not a good choice for everyone. If you have chronic health issues or young children, you might do better off with a traditional form of health insurance like a PPO, instead of a high-deductible health plan. You should not delay getting medical care to keep the funds in the HSA.
It is probably not the right time for you to open an HSA, if it would cause you financial stress. You should use a comparison calculator to decide which health care plan is best for you and your family.
When you eventually withdraw money from your HSA, you must use it for approved medical expenses to avoid getting taxed on the funds. It might be your money, but once it goes into an HSA, the government puts restrictions on how you can use it. Be sure to save all receipts for medical expenses you paid with HSA funds.
AARP. “Your Secret Retirement Investment.” (accessed June 12, 2019) https://www.aarp.org/retirement/retirement-savings/info-2018/health-savings-account-retirement-planning.html
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