Very few people realize that a Health Savings Account (HSA) may be the ultimate retirement account.
The HSA was originally created to help people pay for medical expenses. Because it was called the Health Savings Account, many people often assume that it is only useful as a method of saving taxes related to medical expenses. However, an HSA may be your best option for a retirement account.
No other pension gives you the benefit of a tax deduction for contributions, tax-free growth and tax-free distributions. An IRA offers a tax deduction but has the disadvantage of being taxable when the money is withdrawn. ROTH IRA distributions are tax-free after five years but have the disadvantage of not providing a tax deduction.
An HSA is also a valuable strategy for deducting medical expenses. This is a tax-advantaged medical savings account for people with a high deductible. An HSA requires a minimum annual deductible of $1,400 for personal coverage and $2,800 for family coverage. It also requires a maximum annual deductible of $7,050 for single coverage and $14,100 for family coverage.
A high-deductible health plan is a good strategy if you don’t need a lot of medical care. However, an HSA may not be your best strategy if you or your family have significant medical expenses.
Many employers offer HSAs and high-deductible health plans as benefits. If your employer does not provide health benefits or you are self-employed, you can open an HSA. You will need to find an HSA provider, which may be an insurance company, broker, bank, or credit union.
You can enroll in an HSA-qualified high-deductible plan through your health insurance exchange under the Affordable Care Act.
You cannot open a new HSA while on Medicare. However, you can keep an existing HSA when you enroll in Medicare.
Since an HSA offers the best tax advantages, you should contribute the maximum amount each year before putting money into an IRA or 401K. In 2022, the HSA contribution limits are $3,650 for single coverage and $7,300 for family coverage.
A family that contributes the maximum HSA contribution for 30 years will have almost $1 million after 30 years, with an annual growth rate of 7%. A couple who open an HSA at age 50 could have more than $200,000 in their account by age 65.
Another advantage of an HSA is that you are not required to take minimum distributions, unlike other IRAs.
Don’t overlook the benefits of an HSA when creating your retirement strategy.
David Zubler is a tax accountant and registered agent in East Tennessee, providing tax strategies and representing clients before the IRS and has over 25 years of tax experience. Email him at david@yourtaxcare.com
