HSAs: Part of your Financial Plan
Are you prepared for health care costs in retirement?
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.
HSAs: Part of your financial plan
If you are like most people, you may think about your health savings account (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 savings tool? Your HSA can be used as part of your broader financial planning to create a savings nest egg and potentially save big on taxes.
Consider contributing the max allowed
The more you contribute to your HSA today, the more you have for retirement in the future. Each year the IRS sets limits on how much you can contribute to your HSA. Know the limits that apply to you, consider contributing the maximum allowed, and watch your savings grow!
Here are the IRS contribution limits:
2021 limits:
- An individual can contribute up to $3,600 (increase of $50 from 2020) for the year.
- An individual with family coverage can contribute up to $7,200 (increase of $100 from 2020) for the year.
2020 limits:
- An individual can contribute up to $3,550 for the year.
- An individual with family coverage can contribute up to $7,100 for the year.
Please note: the IRS limit includes any contributions you may receive from your employer. It is your responsibility to monitor your contributions to ensure they do not exceed the annual contribution limit per IRS regulations.
Comparing financial accounts
Unlike other accounts, an HSA is one of the only savings vehicles that allows you to put money in tax-free, grow your savings tax-free (interest and investment earnings are not taxed), and take the money out income tax-free for future qualified medical expenses.
Investing with your LIberty HSA
You need to have $1,100 in your account to be able to invest funds. This ensures you will have cash ready to pay for qualified medical expenses. You can choose to invest any amount over this threshold, in $100 increments, as long as you maintain a minimum of $1,000 in your HSA cash account. This means that you need a minimum of $1,100 in your account before you can invest. Learn more about our investment options.
Planning for retirement: How much will you need?
Knowing how much money you will need in retirement can be confusing. Luckily, Optum Bank has tools to help. You can get a personalized estimate of how much you may need to save for medical expenses in retirement by taking the Health Savings Checkup.
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.
Using your HSA during retirement
The benefits of an HSA don’t stop when you retire. While you are no longer allowed to contribute to your HSA after enrolling in Medicare 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)
As an additional benefit, once you turn 65, you can withdraw the money from your HSA for nonqualified expenses without a penalty. You will just be required to pay ordinary income tax on that amount. Include your HSA as part of your financial planning strategy. Take advantage of both the short- and long-term tax benefits of an HSA.
Catch-up contribution
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.
Withdrawing funds during retirement
You can use the money in your HSA to pay for qualified medical expenses at any time. Once you turn 65, however, you can withdraw the money from your HSA for nonqualified expenses without a penalty. You will just be required to pay ordinary income tax on that amount.
