An HSA, or a Health Savings Account, is a custodial account designed to help people save for healthcare expenses that you would otherwise pay out of your pocket.
HSA-qualified expenses include co-insurance, deductibles, dental and vision care, prescriptions, and many other health-related items.
When optimized properly, your HSA can also work as a "secret" IRA, allowing you to save even more for retirement tax-free. However, It's important to remember that HSAs aren't technically retirement accounts like an IRA, but the rules associated with the account make it an awesome tool for savers who qualify for it.
Your payments to the HSA are all tax-deductible. This is done through payroll deduction, but if you're self-employed, you can do it manually (it's simply more time consuming). That means you can save money on taxes right away by donating, just like you would with a regular 401k.
For example, if you're in the 25% tax rate and contribute the maximum of $6,750 for a family, you may save $1,687 in the first year. You can also save on FICA taxes if the payments are made through payroll deduction (Social Security and Medicare).
You'll save an additional $506 per year this way. As a result, if you contribute the maximum amount, you will benefit.
All of the money in your HSA grows tax-free, just like an IRA. So, if you invest and make a lot of money, those profits are tax-free. Dividends are tax-free if you hold a large number of dividend-paying ETFs. All you have to do now is sit back and watch your money grow over time.
Qualified medical costs can be deducted tax-free at any time with an HSA. We'll get into more detail about this in a moment, but remember that phrase: withdrawn at any time. Your HSA account is not like a flexible spending account in that there are no deadlines for reimbursement.
After you reach the age of 65, your HSA functions similarly to a standard IRA. There are no penalties for taking money out of your account; you will only have to pay ordinary income tax on it. As a result, you can use your HSA in conjunction with other retirement funds in retirement to achieve tax diversification.
Another unstated advantage of the HSA is that after age 65, you can use your HSA funds to pay your Medicare premiums tax-free. This is huge, since no other medical savings account has ever enabled tax-free money to be used for Medicare or insurance premiums.
You may not realize it, but your Medicare premiums might cost you $400 every month. You might utilize pre-tax money instead of other accounts or Social Security if you have an HSA.
So, while all of those tax advantages are appealing, how can you use the HSA as if it were a "hidden" IRA? So, let me tell you about a little-known HSA trick that puts the HSA over the top.
As mentioned earlier in the article, you can easily withdraw money from your HSA at any time. This feature is what makes the HSA so effective, that experienced financial planners advocate using it as your primary retirement savings vehicle.
Basically, if you can afford to pay your medical expenditures today, you should maximize your HSA contribution by combining your money and your employer's contributions.
Most HSA-eligible businesses contribute anywhere from $600 to $1,250 to your account. That's a no-cost match, similar to a 401k. That's a free match, just like a 401k, and you never want to leave money on the table. So, it's then on you to make up the difference to contribute to the maximum.
If you qualify for a Health Savings Account or HSA, you need to be maxing it out each year and leveraging it like an Individual Retirement Account. The HSA plays a critical role in the order of operations for saving for retirement.
The key benefits of using HSAs as an IRA include its triple tax savings, its rollover feature which allows different employers to contribute to the account. You can also be reimbursed expenses anytime, plus it acts like a traditional IRA after age 65. Why not take advantage of a HSA to boost your retirement savings?
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