By: James White
When it comes to retirement planning most of us think firstly of our 401k, Pension, and maybe our Roth IRA. However, many never consider saving for one of retirement’s biggest costs with the most tax-advantaged vehicle under the IRS code. Saving for healthcare costs with a Health Savings Account (HSA) can potentially be your retirement plan’s fortifying feature. Homrich Berg believes that after contributing to your 401k, up to the company match, the next best place for retirement savings could be in a HSA up to its limits for those who are eligible (more on eligibility below)… The following are four reasons your HSA can be more advantageous than other savings vehicles:
- Increased Tax Benefits – HSA contributions are pre-tax, meaning they reduce your taxable income, they grow tax-free, and are distributed tax-free for eligible expenses. No other savings vehicle has as many tax advantages.
- Medicare and Private Insurance Eligibility – your HSA can distribute assets tax-free to pay for Medicare, private healthcare insurance, and long term care insurance premiums during retirement.
- Funding Unexpected Medical Bills – Under a 401k, for example, all distributions in retirement are taxed at Ordinary Income rates. The combined state and federal tax rate can be over 35% for some people. An unexpected $5,000 medical bill can require a withdrawal of $7,700 including taxes. If you have a funded HSA account, these withdrawals are tax-free, thereby reducing the gross amount of savings needed for unexpected distributions.
- Penalty-Free Distributions Before Age 59 ½ — There are no penalties for early withdrawals in a HSA. In fact, you can contribute, receive credit for the pre-tax income deduction, and immediately distribute the contribution for an eligible healthcare cost. If 401k savings money were needed before age 59 ½ there would be a 10% penalty plus taxes.
You must be enrolled in a Qualified High Deductible Healthcare Plan in order to be eligible to make HSA contributions. In 2020, contribution maximums are $3,550 for single filers and $7,100 for those married filing jointly. If over the age of 55, you are allotted a catch-up contribution of an additional $1,000. Consult with your tax advisor or CPA regarding eligibility and appropriateness of this strategy. Some risks may include the inability to maintain tax-advantages for non-spouse beneficiaries, a 20% penalty and loss of tax advantages for non-qualified distributions, as well as limitations on investing HSA savings. Some accounts offer significantly more investment options than others, so be sure to ask your financial advisor which account is best for you.