Using HSAs in Your Retirement Planning
Health savings accounts (HSA) can be a powerful tool when incorporated into your retirement planning. Too often HSAs are only considered for immediate or near-term medical costs. However, when used strategically, HSAs can provide years of benefits well beyond the current tax year.
Triple Tax Advantage
Health savings accounts are one of the most tax favorable instruments in the market today. Most plans are contributed to through pre-tax deposits through an employer-sponsored plan. Funds then grow tax-free year after year. Finally, funds may be withdrawn tax-free for qualified expenses.
Long Term Care Costs
Nursing homes can be expensive with annual costs eclipsing $90,000 a year. Health savings accounts may be used to pay the premiums for a tax-qualified long-term care insurance policy. When long-term care services are rendered, the HSA can pay for the costs not covered by Medicare while retaining the tax-free benefits.
Estate Planning Benefits
For married couples, it isn’t uncommon for one individual to not need to dip into their health savings accounts. If your spouse is named as the designated beneficiary, any funds left within the account will be passed on with the same triple tax advantages of the original account.
Pay for Non-Medical Expense
A common misconception about health savings accounts is the funds must only be used for medical costs to receive the tax benefits. This is certainly not the case. The items and services eligible to HSAs are far-reaching and encompass such items as acupuncture, feminine hygiene products, and even guide dogs. And after reaching the age of 65, the 20% penalty disappears for non-eligible items, only leaving you to pay income tax on the withdrawal.
Pay for Pre-Retirement Expenses
Medicare eligibility begins at age 65. If you plan on retiring early, a health savings account can be used as a bridge between when your employer-sponsored plan ceases and Medicare kicks in. If your goal is to retire early, look to funding an HSA early and often to provide a fund outside of your general savings for medical costs.
If you have questions or would like to learn more about HSAs and retirement planning, contact our office.
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