It's important to set money aside for retirement and not simply plan to fall back on Social Security benefits alone. Those benefits will only replace about 40% of your pre-retirement wages if you're an average earner, and most seniors need a lot more money than that to live comfortably while being to cover their various bills.
Now when it comes to saving for retirement, you have plenty of options. You could sign up for your company's 401(k), or pump money into an IRA if you're not a fan of your employer's plan. But a good bet is to prioritize a retirement savings plan that will give you access to the maximum number of tax benefits. And that's neither an IRA or a 401(k) plan.
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Focus on your HSA
An HSA, or health savings account, might not even seem like a retirement plan in your mind. But here's why it is.
HSAs allow you to carry your money forward indefinitely. So if you fund an HSA during your working years, you can leave that money alone, invest it, and reserve all of it for your senior years, when your healthcare costs are likely to be higher.
If you fund an HSA this year, you'll benefit tax-wise in three different ways:
- Your contributions will be tax-free.
- Investment gains in your account will be tax-free.
- Withdrawals from your HAS will be tax-free as long as they're used for qualified medical spending.
Now as you might imagine, taking an HSA withdrawal for non-medical purposes will result in penalties, the same way you'll commonly be penalized for taking an early withdrawal from a 401(k) or IRA. But once you turn 65, penalties for non-medical HSA withdrawals are waived. So funding one of these accounts really is a no-risk prospect, since you'll have an opportunity to use your money in one way or another.
Maxing out your 2023 HSA
The amount of money you're able to contribute to an HSA this year will hinge on your health coverage status and age.
If you're under age 55, you can contribute up to $3,850 to an HSA for self-only coverage, and up to $7,750 for family level coverage. If you're 55 or older, you get to make catch-up contributions in your HSA that raise these limits to $4,850 and $8,750, respectively.
You should also know that HSA eligibility hinges on being enrolled in a high-deductible health insurance plan. This year, that means an individual deductible of $1,500 or more, or a family deductible of $3,000 or more.
Furthermore, you can open an HSA on your own if your employer doesn't offer one. Some companies, however, fund HSAs on workers' behalf, so it pays to see if yours offers this benefit.
Clearly, you have plenty of options when it comes to socking money away for retirement. But focusing on your 2023 HSA is a move that could really work to your benefit. There's a good chance that once you retire, healthcare will become your greatest monthly expense, surpassing even the cost of housing. So the more money you have earmarked for that specific expense, the less financial stress you might encounter down the line.
