When you sign up for benefits at your company, do you have an option to choose a medical plan that has a Health Savings Account (HSA) attached? Not all companies offer these and only certain types of medical insurance plans allow them. But, if your company is one that offers these, you should stop and see if this might serve as a powerful retirement tool for your future.
What is an HSA (Health Savings Account)?
An HSA is a special savings account that is typically attached to high deductible health care plans, and allow you to invest money before tax (meaning you get an immediate tax break on the money you save). Singles can save up to $3,450 a year in 2018 and a family can save $6,850 (total of your entire family and your employer contributions). If you are over 55, you can add another $1,000. Most accounts will let you invest the money in options ranging from money markets to mutual funds.
The earnings on the account are not taxed along the way and, when the money is withdrawn to pay for qualified medical expenses, the withdrawals are tax-free. Sometimes employers will even contribute some money to your account as well.. and that is not taxed either!!
Why is this a spectacular deal? It’s spectacular because there is not another savings plan I know of that is triple tax free. Think about the following:
401(k)’s, IRA’s, 403(b)’s, and other such plans give you an upfront tax deduction and tax deferrals of earnings. But they are taxed as income when you take the money out in retirement.
Roth 401(k)’s and Roth IRA offer tax deferral of earnings and tax free withdrawals. But you get no tax break on the money you invest.
An after-tax account (like a bank savings account or brokerage account) offers no tax break up front, you pay money on the earnings all along the way but you don’t pay taxes on the money when you withdraw it.
Social Security may be the worst one. You get no tax break up front and later you likely have to pay taxes again on up to 85% of the benefits. But not a lot of choice on this option...best to just pay it and mentally move on.
The chart below summarizes common retirement options. There is only one plan that is green across the row.
Using Your HSA as a Retirement Option
It may be strange to think of your Health Savings Account as a retirement option but if your medical expenses are low enough and/or you can cash flow everyday medical expenses, you can keep the HSA investments growing tax free. This could grow into a large medical emergency fund or a nest egg that you can use to pay for medical expenses, including Medicare payments, far off in the future.
Fair warning, the rules are strict. It must be used for qualified medical expenses to be tax-free and the penalties on non-qualified withdrawals before age 65 are 20% on everything you take out! But what are your odds of not needing to pay for medical care at some point between now and day you die?
HSA’s are not available to everyone and using them as a retirement tool is not right for everyone even if they have that option. But for some investors, this can be one of the most powerful retirement tools you didn’t know you had. If you are not sure if it’s right for you, contact your fee-only, fiduciary financial planner to talk about it.
Investment advisor representative of and investment advisory services offered through Garrett Investment Advisors, LLC, a fee-only SEC registered investment advisor. Tel: (910) FEE-ONLY. Synergy Financial Planning may offer investment advisory services in the State of Connecticut and in other jurisdictions where exempted.
Investing involves substantial risk and has the potential for partial or complete loss of funds invested. Investments mentioned may not be suitable for all investors. Before investing in any investment product, potential investors should consult their financial or tax advisor, accountant, or attorney with regard to their specific situation.