A health savings account offers a tax-saving trifecta: You put money in the account pretax, let it grow tax free and take it out tax free to pay for qualifying medical expenses. These accounts are growing in popularity, with participants contributing $33.7 billion to their accounts last year, up 22% from a year earlier, according to Devenir Research. And financial advisers increasingly see them as a savvy strategy for stashing money away for your post-working life.
How to use your HSA in retirement
“More and more people have HSAs available to them,” says Kristen Donovan, a retirement adviser with Buckingham Strategic Wealth, in St. Louis, Mo. The total number of HSAs grew to 25 million in 2018, up 13% from 2017, according to Devenir. If you qualify for an HSA, “you don’t want to miss the opportunity to take advantage of the triple tax benefit and the ability to put more money aside for retirement,” she says.
Not everyone can open an HSA. To contribute to an HSA, you must be enrolled in a high deductible health plan through your employer or have an HSA-eligible health insurance policy. Compared to a traditional insurance policy, you typically pay lower monthly premiums with an HSA-compatible policy, but you pay for more of your medical costs before insurance kicks in.
If you qualify and open an HSA, you should both maximize its benefits—perhaps letting the account grow instead of tapping it for current out-of-pocket medical costs, if you can afford it—and avoid a few pitfalls. If you’re not careful to name a beneficiary, for example, your heirs might face a delay in receiving the money from your account.
Although you can’t contribute to an HSA once your Medicare coverage starts, you can use your HSA to offset medical costs in retirement, which is often a retiree’s single biggest expense. That includes using the HSA to pay Medicare premiums.
You can also save receipts for out-of-pocket medical expenses in the years before you sign up for Medicare. Then, use your HSA to pay yourself back for those racked-up expenses, giving you a tax free lump sum in retirement. “When it comes to retirement time, you can add up all those receipts together and write yourself a check,” says Craig Keohan, chief revenue officer for HealthSavings Administrators, a Richmond, Va., HSA provider.
Qualifying for an HSA
An HSA-eligible health insurance policy must have a deductible of at least $1,350 for single coverage or at least $2,700 for family coverage. If you meet that requirement, you can contribute up to $3,500 to an HSA in 2019 for single coverage, or up to $7,000 for family coverage. If you are 55 or older, you can add an extra $1,000 catch-up contribution for the year.
Name a beneficiary as soon as you open your account, says Kevin Robertson, senior vice president of HSA Bank, in Milwaukee, Wis. People often skip that step, he says. That way the money can go directly to the beneficiary at your death, instead of through your estate. If you are married, your spouse will inherit the account’s tax benefits. But a non-spouse heir of an HSA will have to take a distribution of all the assets and will owe income tax on the entire amount. The heirs can use the funds to pay for the deceased account owner’s qualified health expenses incurred before death, as long as the expenses are paid within one year of the death, Robertson says.
If you are nearing age 65 and considering signing up for Medicare, make sure you understand how it works with an HSA, Robertson says. When you enroll in Medicare, you don’t have to stop contributing to an HSA immediately. Enrollment simply refers to signing up, which still gives you a grace period to continue making HSA contributions, he says. But you must stop making contributions once Medicare coverage begins.
After you enroll in Medicare, the HSA contribution restriction starts the month your Medicare coverage begins. If you enroll in April for Medicare coverage starting June 1, for example, you could contribute to your HSA for the first five months of that year, Robertson says.
You could delay signing up for Medicare Part A and Part B to continue making HSA contributions, which you might consider if your employer offers a match. But you typically can’t delay Medicare if you work for a firm with fewer than 20 employees or if you sign up for Social Security, which automatically enrolls you in Medicare Part A.
But beware this tax trap if you delay signing up for Medicare: When you finally enroll in Medicare Part A, you get up to six months of retroactive coverage. If you don’t stop your HSA contributions at least six months before you enroll, you could get hit with a tax penalty.
Along with using your account after age 65 to pay for medical expenses tax free, you can withdraw money for other uses—you’ll pay regular income tax on the amount withdrawn, but past age 65, you won’t face the 20% early-withdrawal penalty, Keohan says.
Adding an HSA to your overall retirement strategy
Donovan says more financial advisers are working with clients to use HSAs, along with 401(k) plans and IRAs, as part of their overall retirement savings strategy. “There’s been a shift in the thinking,” she says. In the past, advisers sometimes considered HSAs just as an alternative to flexible savings accounts (FSAs), which allow employees to set aside pretax dollars for out-of-pocket medical costs. “But as we’ve seen HSA balances starting to grow, advisers are looking at using the accounts as an additional investment vehicle for retirement,” she says. For example, there are no required minimum distributions for HSAs, so the money can grow as long as you like, even well into your retirement.
Another potential benefit: Some employers offer their participants a company HSA contribution. For HSAs with an employer contribution in 2018, the average contribution rose to $839, from $604 in 2017, according to Devenir. Note that any amount your employer puts into your HSA counts toward your annual contribution maximum. If your employer puts in $800 this year, you can contribute only up to $2,700 for single coverage.
If your employer doesn’t offer an HSA—or you don’t like your employer plan’s costs or investment choices—you can open an account on your own. You may not be able to get automatic payroll deductions, but you may find lower fees and better investing options. Use Devenir’s HSA search tool at hsasearch.com.
If you switch jobs, you can keep your previous HSA or combine it with a new one, because the accounts are portable. Or you can continue to contribute to your old HSA, if your new employer doesn’t offer one but your health plan is eligible, Robertson says. Compare fees and expenses, along with investment options, to decide which one is best for you, he says.
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