Retirement looks different to everyone. Some people dream about buying a tiny home and exploring the country, while others dream about living in a house that’s mortgage free and taking up hobbies like knitting to pass the time.
No matter what retirement looks like for you, there’s one inescapable fact: You’re going to need money to fund your retirement years. While saving for retirement in a 401(k) or IRA is a great option, there’s a new kid on the block when it comes to retirement savings, a Health Savings Account (HSA), and it might just be the best thing since sliced bread.
What is a Health Savings Account
A health savings account is a special type of savings account that accompanies high-deductible health insurance plans that meet specific guidelines. For simplicity, if you qualify for a health savings account, you would have both your high-deductible health insurance plus the option to open a separate HSA account based on the below guidelines set each year.
For 2019, to qualify for a health savings account, you need to have a health insurance plan with a minimum deductible of $1,350 for self-only coverage and $2,700 for family coverage. If your health insurance plan is deemed HSA compliant, you can qualify to set up an account. In 2019, you can save up to $3,500 for an individual or $7,000 for a family.
The best part of an HSA is that unlike a flexible spending account, the money you put in doesn’t expire at the end of the year.
A health savings account is also a treat for savers because it offers three amazing benefits to help you save for retirement:
- The money you contribute grows tax-deferred.
- Withdrawals that pay for qualified medical costs are tax-free.
- You can invest your savings in mutual funds to potentially grow your investment.
The best part of an HSA is that unlike a flexible spending account, the money you put in doesn’t expire at the end of the year. For that reason, you can continue to bank your funds year after year if you chose to use your health savings account as an addition to your retirement savings. The great news is that you have lots of options when it comes to how you spend your HSA account.
How Can You Use an HSA for Retirement?
Since we’ve already established that health savings accounts have three amazing benefits, let’s look at how you can use your account for retirement. Think of your HSA as a health IRA. When it comes to planning for retirement, the more money you can save the better off you’re likely to be. The health savings account provides a great retirement savings account to accompany any money you’re contributing to your 401(k) or other retirement savings accounts.
Any savings that you contribute each year comes with choices. You can use that money to pay for your qualified medical expenses as they come up. For example, medical expenses such as getting new glasses, co-pays at your doctor's office or getting a root canal. Or, you can simply bank your savings and grow your money tax-deferred until you reach the age of 65.
Some examples of qualified medical expenses include:
- Birth control pills
- Dental treatments
- Eye exam
- Annual physical exam
- Contact lenses
- Eye surgery
- Fertility enhancement
Every health savings account provider offers investing options that you can select from based on your risk tolerance. If you are not comfortable risking your HSA savings, you can always leave the money stashed in a money market account that is not tied to the stock market index. The choice is yours. Also, after age 65, you can choose to use your savings on any expense, not just health-related expenses.
A health savings account is one of the best win-win-win financial savings accounts to help you get closer to your retirement savings goal.