An easily overlooked investment account can give retirement savings a huge boost - if it's used the right way
- Health savings accounts are exactly what they sound like: savings accounts that can be used for expenses related to your health - now, in retirement, or any time in between.
- You must be enrolled in a high deductible health plan to contribute to an HSA, but you can open an HSA even if your employer doesn't offer one.
- But HSAs aren't any old savings account. You can invest the money in your HSA, building up a cushion to help with medical expenses in retirement, particularly costs not covered by Medicare.
- Contributions to HSAs are made pretax; earnings and interest on investments are tax-free; and withdrawals made for qualified medical expenses are tax-free.
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Healthcare may be one of the biggest costs retirees face.
While the most basic Medicare plan is free for most people over 65, it covers but a fraction of the healthcare needs for the typical retiree. If you're one of the millions of Americans worried about being able to afford medical expenses in retirement, you may want to consider putting money aside in a health savings account.
Health savings accounts, or HSAs, are exactly what they sound like: savings accounts that can be used for expenses related to your health - now, in retirement, or any time in between.
Established in 2004, HSAs have become enormously popular over the last decade - the Center for Disease Control and Prevention reports that nearly 19% of Americans had a health savings account in 2017, up from about 4% in 2007 - and it's clear why.
Health savings accounts are a tax-savings bonanza
An HSA is a triple tax-free investment account - contributions are made pretax; earnings and interest on investments are tax-free; and withdrawals made for qualified medical expenses are tax-free. As such, it is one of the most powerful investment tools out here.
But wait, I thought you said it was a savings account for healthcare? It is, but just like your 401(k) or IRA, you can invest the money held in your HSA for maximum growth, which is why it's such a valuable tool for preparing for costs you'll inevitably face in retirement.
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In 2019, a single person can contribute up to $3,500 and a married couple can contribute up to $7,000 to an HSA, plus a $1,000 catch-up contribution for folks over 55. Unlike its not-so-distant cousin, the flexible spending account (FSA), the money in a health savings account doesn't expire. You can spend it on qualified medical expenses for the rest of your life (although you will have to stop contributing to the account at age 65) and never pay taxes.
Who can have an HSA?
HSAs aren't on the table for everyone. They're available only through high deductible health plans (HDHP), a type of health insurance plan with low monthly premiums and high out-of-pocket costs.
To contribute to an HSA in 2019, you must belong to a health insurance plan with a deductible of at least $1,350 if you're single, or $2,700 if your plan covers two or more people. If you or anyone in your family has chronic medical problems, or you consistently find yourself in the doctor's office, a HDHP may not be right for you.
HDHPs, and thus HSAs, are ideal for young or healthy people who don't anticipate needing to spend a lot on healthcare in the near future. If you need to switch to a different health plan later, fear not: the money in your HSA will stay with you forever.
Read more: How to retire with health insurance if you're too young for Medicare
If you're interested in an HSA but you get health insurance through your employer, you can open an HSA whether the company offers one or not, as long as HDHP is your only coverage, you aren't enrolled in Medicare, and you aren't being claimed by anyone as a dependent. The IRS website has all the details on eligibility.
What can I pay for with an HSA?
As previously mentioned, you can use the money in a health savings account to pay for "qualified" medical expenses whenever you want - now, in retirement, or any time in between. Eligible expenses include everything from bandages and hearing aids to psychiatric care, prescriptions, and long-term care.
HSAs can also be used to cover hearing and vision exams, and dental procedures, none of which are covered by traditional Medicare, making HSAs a huge asset to retirees.
Read more: 3 expenses to avoid if you want to retire in 10 years
Your HSA provider will give you a debit card that can be used to pay for qualified purchases, or you can submit a claim with a receipt for reimbursement. If you wind up using your HSA for a purchase that's not on the IRS-approved list, you will have to pay income tax on the amount, plus a 10% penalty.
Why should I invest my HSA?
If you're in good health and can manage to cover any marginal medical expenses out-of-pocket for now, you can truly maximize the benefits of an HSA by treating it like any other retirement account.
"Not investing the money in your health savings account is a big mistake," financial expert Jean Chatzky previously told Business Insider. "If you invest it, if you put it into a portfolio of mutual funds, index funds, ETFs, it can grow for you just like your retirement accounts are growing. And then if you don't need to draw on the money in particular year, you can just continue to rack it up. It's portable, you can take it from job to job - it becomes a real supplemental retirement account."
Some HSAs require you hit a minimum balance in your account before you can start investing any amount over that, but it should be fairly easy to hit the mark when you're contributing pretax dollars.
Bear in mind that like any other investment, money invested within an HSA involves some level of risk. But depending on your financial situation and what you anticipate retirement will look like, it could be worth it. As Business Insider's Alex Morrell explained, if you started maxing out your HSA at age 25 and kept doing so for 40 years without withdrawing anything, it would be worth more than $1 million by the time you reach age 65 if you earned a 7.5% annual return.