Use your HSA as a tool for retirement savings
A health savings account (HSA) is a great tool to help you prepare for future health care costs and retirement. Plus, it can help you save on taxes.
Boost your retirement income with HSA savings
Have you ever thought of your HSA as a tool to boost retirement savings?
If you are like most people, you may think about your HSA solely as a way to pay for current-year qualified medical expenses, such as trips to the doctor or prescriptions. But did you know it can also be used as a long-term investment vehicle that can play an even greater role in your overall wealth and retirement strategy?
You can use your HSA with other retirement accounts to maximize your after-tax retirement income. Saving in an HSA for retirement gives you a tax-advantaged account dedicated to future medical expenses — allowing you the opportunity to avoid dipping into retirement accounts intended for cost-of-living expenses. Also, HSAs are a great way to pay for qualiﬁed medical expenses in retirement.
Get ahead on taxes in more ways than one
HSAs are triple tax advantaged, making them an effective savings and investment account:
- Withdrawals for qualified medical expenses are income tax-free.
- All contributions to an HSA are income tax-free.
- And, any interest earnings and investment growth from deposits are income tax-free.
Unlike other accounts, an HSA is one of the only savings vehicles that allows you to put money in on a before-tax basis through payroll contribution, grow your savings tax-free (interest and investment earnings are not taxed), and take the money out income tax-free for qualified medical expenses. With a 401k, you’ll always pay taxes when you withdraw funds but, if you use HSA funds for qualified medical expenses — it’s generally 100% income tax-free. Plus, after turning 65 you can use your HSA funds for non-qualified expenses. You’ll pay ordinary income tax on those funds, but the 20% tax penalty no longer applies.
Maximize your savings by investing
Investing HSA dollars has many potential tax benefits and can be an additional way to save for long-term health care expenses and financial goals. Once your HSA reaches a certain designated balance, typically $2,000, you may choose to invest a portion of your HSA dollars.
You have two smart investment options.
Option 1: Optum Bank self-directed mutual funds: You can choose from a wide variety of over 30 mutual funds, that average a 4-star Morningstar rating and represent some of the lowest expense ratios in the industry, including life stage funds. The Asset Allocation Calculator can help you decide which funds are right for you.
Option 2: Betterment digitally managed investments: Betterment helps take the guesswork out of investing your HSA. Based on your HSA investment goals, Betterment will recommend a personalized portfolio of low-cost exchange-traded funds (ETFs) and help keep your HSA investment on track through auto deposits and automated rebalancing. If you’re saving your HSA for retirement, Betterment can also help you manage your investments alongside your other retirement accounts to help you maximize your after-tax retirement income.
Fill in the gaps of medical costs
HSAs and Medicare
It's important to max out your HSA now, because once you enroll in Medicare, you can no longer contribute to your HSA — but you can still use your HSA funds income tax free to pay for qualified medical expenses. You can also use your HSA to pay for Medicare premiums and qualified out-of-pocket expenses including deductibles, copays and coinsurance for:
- Part A (hospital and inpatient care)
- Part B (doctor and outpatient care)
- Part D (prescription drugs)
Once you turn 55, you can contribute an additional $1,000 each year to your HSA, called a catch-up contribution. If you and your spouse are both over the age of 55, you can each contribute an additional $1,000. Your spouse will just need to open their own HSA for their additional portion.
Your HSA savings can really add up. If you can contribute $3,000 a year, you’d get over $1,000 in tax savings. Do that for five years, and you’d have $15,000 in your account plus over $5,000 in tax savings.*
Hank saves for retirement with an HSA
Hank is 60 and preparing for retirement. For the past five years, he has been contributing the maximum amount allowed by the IRS. See how fast his account balance has grown — and how much he’s saved on taxes.**
over the past 5 years
on taxes in the past 5 years
* Results and amounts will vary depending on your particular circumstances. This example assumes individual is in 25% federal tax bracket and 5% state tax bracket.
** Contributions are based on IRS contribution limits for family coverage from 2016-2020 and include catch-up contributions. Tax savings assumes a 25% federal tax rate, 5% state tax rate and 7.65% FICA.