How to Use Your HSA for Retirement Planning

How to Use Your HSA for Retirement Planning

February 22, 2024

The rising cost of healthcare has become a significant concern for many Americans. A large number of the population worry about their ability to afford essential medical treatments as they age. Even with comprehensive health insurance coverage, the potential risk of unexpected medical emergencies depleting your emergency fund exists.

Thankfully, there is a solution to ease the burden of escalating healthcare costs: a tax-advantaged health savings account (HSA). At Wilkinson Wealth Management, our aim is to offer you a clear understanding of the benefits and possible drawbacks of setting up an HSA. We want to empower you to make an informed decision about whether it aligns with your financial goals.

HSA Benefits

One of the strongest arguments for opening up an HSA is it allows you to lower your federal income taxes by making tax-free deposits into your account. Because tax hasn’t been taken out, you end up with potentially more to contribute. Many people have their HSA money withheld directly from their paycheck so that they never even see it in their bank account. However, you don’t have to have it automatically withheld—you can just take a deduction when you file your taxes for the same result. Either way (saving now or saving later) you still save on taxes by contributing to an HSA.

Depending on the account, some HSAs also provide the option to invest the money you contribute in mutual funds, ETFs, stocks, or bonds. The earnings you make from the HSA are also tax-free as long as you withdraw the funds to pay for qualified medical expenses.

A Retirement Planning Strategy

While many people use their HSA funds to pay for current out-of-pocket medical expenses, you can also leave your contributions in your HSA and invest them for the long term, letting them grow for use in retirement, when you’ll likely need them most. HSAs are a great complement to your other retirement savings accounts, allowing your IRAs and 401(k)s to cover regular living expenses. In this way, your HSA acts as a contingency fund earmarked just for health costs. 

Why wouldn’t you just stick with traditional retirement accounts like IRAs or 401(k)s? An HSA is what is sometimes called “triple tax advantaged”; because contributions are made pre-tax, they grow tax-deferred, and distributions are tax-free when used for qualified medical expenses. This means they have better tax treatment than other retirement accounts that are typically only tax advantaged in two ways: with tax-deferred growth and then either when contributing or when distributing. 

Leveraging HSAs for Long-Term Medical Expense Flexibility

Another advantage of HSAs is the flexibility they offer in managing medical expenses over an extended period. With HSAs, you have the option to save your medical receipts for years or even decades before claiming reimbursement from your HSA, allowing you to accumulate a substantial amount of eligible expenses. This strategic approach enables you to pay for medical costs out of pocket now and request reimbursement much later, perhaps during retirement. By doing so, you can maximize the tax benefits of the HSA, as qualified medical expenses remain eligible for reimbursement whenever incurred. 

What Do I Need to Get Started With an HSA?

To qualify for contributing to an HSA, you must meet the following requirements:

  • Be covered under a high-deductible health plan (HDHP)
  • Have no other healthcare coverage
  • Not be enrolled in Medicare
  • Not be claimed as a dependent on someone else’s tax return

As of 2024, an individual who has an HSA can contribute up to $4,150 per year, and $8,300 for family coverage (up from $3,850 and $7,750 in 2023, respectively). Individuals who are over the age of 55 can make additional catch-up contributions in the amount of $1,000 per year to their HSAs. 

HSA Withdrawals 

You can use the money you deposit in your HSA to pay for medical expenses before you meet your deductible on your HDHP. Such medical expenses include the usual healthcare costs, such as deductibles, copayments, and vision and dental expenses. But you can also use it to pay for many over-the-counter medications and non-traditional medical costs, such as acupuncture or chiropractic visits. Additionally, you can use the account to cover medical costs for your immediate family members or spouse even if they are not under your HDHP.

One of the most beneficial attributes of HSAs is that the funds roll over from year to year, which means these tax-free funds can grow if they are invested for many years. Once you reach the age of 65, you can withdraw the funds without a penalty and use them on non-medical expenses; however, you will pay income tax on the funds with this method. In this way, an HSA can function similarly to a pre-tax or traditional IRA or 401(k). If you are enrolled in Medicare, you can use HSA funds to pay for Medicare premiums, though you cannot use HSA funds to pay for Medicare supplement premiums or other healthcare premiums without potential taxes or penalties.

Should I Choose a High-Deductible Plan?

Determining whether a high-deductible health savings account (HSA) plan is the right fit hinges on whether you need to have surplus cash flow to cover medical expenses, which may allow you to retain funds in the HSA for potential investments. With a high-deductible plan, you typically face lower monthly premiums but higher out-of-pocket costs. The key advantage lies in the opportunity to contribute to the HSA, where funds can be invested and potentially grow over time. It’s important to assess your financial situation and risk tolerance to decide if this approach aligns with your overall financial goals and healthcare needs.

Potential Disadvantages of HSAs

There are many advantages that HSAs offer, but they do not make sense for every family and every situation. 

It goes without saying that illness can be unpredictable and, therefore, it can be hard to budget for healthcare expenses. This is why it’s so important to assess your free cash flow and understand how you would cover out-of-pocket costs. Additionally, those with chronic illnesses or frequent medical visits may find that a high-deductible health plan, even with the option for an HSA, may not be the right fit. 

A Partner to Help You Save

To make the most of your health savings account, having the support of a reliable financial professional can be a game-changer. Understanding the ins and outs of HSAs demands knowledge and experience, allowing you to make decisions that align with both your financial goals and healthcare needs. 

At Wilkinson Wealth Management, our committed team is here to guide you through the entire process. Reach out to us at 434-202-2521 or use our Contact Us page to schedule an appointment. Let’s explore how we can enhance your financial well-being together.

About Kirsten

Kirsten Ashbaugh is a financial advisor and CERTIFIED FINANCIAL PLANNER® professional at Wilkinson Wealth Management, LLC. Her experience includes extensive financial planning and portfolio management, as well as expertise addressing the specific challenges of women and small business owners. She is available to help clients with managing assets, determining insurance needs, and comprehensive financial planning - including planning for major purchases, education, and retirement.

Originally from Pittsburgh, Kirsten relocated to Charlottesville in 2020, and loves exploring the local culture and food (noting a particular fondness for the local bakeries). Outside of work, she and her husband enjoy hiking and travel, with a goal of visiting at least one foreign country every year.