HSAs and Your Retirement

From time to time we get questions from clients regarding using an HSA (Health Savings Accounts) to supplement retirement. This topic has become very trendy…. from folks who sell HSAs.

First and foremost, HSAs are an excellent way to tax-efficiently pay for current and future medical expenses using pre-tax dollars. There is no requirement to spend it or lose it like with Flexible Spending Accounts.

The money you withdraw for qualified medical expenses is tax free. If you have a high-deductible health plan, you can contribute $7,100 for family coverage in an HSA.

Some providers are touting this as a way to save more money for retirement and they are right to a point. The rub is if you do not use the money withdrawn for a qualified medical expense then it is taxed as ordinary income….after age 65. Prior to age 65 there is an additional 20% penalty in addition to the ordinary income tax for nonmedical withdrawals.

The bottom line for us is this; if you can, contribute to your HSA at the maximum rate allowed. Second, reserve those funds for qualified medical expenses. Some estimates are a healthy 65 year-old couple retiring this year will need to have saved $390,000 after tax to pay for future medical costs. (Mercado, Darla. “Retiring This Year? How Much You'll Need for Health-Care Costs.” CNBC, CNBC, 18 July 2019, www.cnbc.com/2019/07/18/retiring-this-year-how-much-youll-need-for-health-care-costs.html.)

So you can see, you may have many opportunities to withdraw the funds unencumbered by taxes. The IRS Publication 502 Medical and Dental Expenses will let you know what qualifies.