Health savings accounts (HSAs) are a great place to stash cash for an upcoming medical procedure or for emergencies. But that's just scratching the surface of what these accounts can do. They also make great homes for your retirement savings. Here are three benefits you can look forward to if you hold your HSA savings for the long term.
1. Tax-free medical withdrawals
The primary benefit of saving in an HSA is that your medical withdrawals are tax-free at any age. And unlike flexible spending account (FSA) funds, your HSA funds don't expire at the end of the year, so you can leave your money there for as long as you'd like.
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This can be especially valuable to seniors, who often see their medical costs rise compared to when they were younger. If you're comfortable saving for today's medical costs in a savings account, you could reserve your HSA for money you want to put toward your retirement medical expenses.
You can contribute up to $3,850 to an HSA in 2023 as long as you have an eligible individual health insurance plan with a deductible of $1,500 or more. Families with health insurance deductibles of at least $3,000 may contribute up to $7,750 to an HSA in 2023. And adults 55 and older can add an extra $1,000 to these limits.
2. Penalty-free non-medical withdrawals after 65
Normally, you'll pay taxes plus a 20% penalty on non-medical withdrawals you make from your HSA. But once you turn 65, the penalty goes away and the account becomes similar to a traditional IRA or 401(k).
You will still owe taxes on non-medical withdrawals, but there are no rules on how you can spend that money. So if you don't need all that you've saved for medical expenses, you can still make use of that extra cash.
3. No required minimum distributions (RMDs)
Nearly all retirement accounts, except Roth IRAs, have required minimum distributions (RMDs) that begin in the year you turn 73. These are mandatory annual withdrawals you must make from your retirement savings in order to give the government its cut via taxes. They're not a big deal for everyone, but they could increase your tax bill in retirement if you're forced to withdraw more than you originally planned. And skipping them isn't an option because you'll pay a penalty on the amount you should've withdrawn.
Fortunately, HSAs aren't subject to RMDs, so you can leave your savings in your account as long as you'd like. This gives your money additional time to grow until you're ready to use it.
How to get the most out of your HSA
Regular contributions are key if you plan to make your HSA part of your retirement savings strategy. See if your account enables you to set up automatic transfers and then decide how much you'll put there each month or each pay period. Be careful not to exceed the annual contribution limits discussed above, or you could face penalties.
Whenever possible, you should invest your HSA funds to help them grow more quickly. Investing carries some risk of loss, but it can also help you grow your wealth much faster than you could if you were limited to the modest interest rates you'd find with a traditional HSA.
Check with your HSA provider to see if this is an option for you. If not, consider opening a different account that gives you this option.
An HSA might not be a great home for all your retirement savings due to its low annual contribution limits. But you can always put your money here first and then switch to an IRA or 401(k) afterward if you'd like. Feel free to change which retirement accounts you use over time as your circumstances change.
