No matter what age you retire at or where you live, your senior years aren't going to pay for themselves. Rather, you'll need to amass some savings to ensure that you're able to comfortably pay your bills and, ideally, have some cash left over for leisure and entertainment.
When we think about saving for retirement, it's easy to think of well-known accounts like IRAs and 401(k) plans. But there's another type of account you may wish to add to the mix -- a health savings account, or HSA.
In fact, HSAs are growing increasingly popular, according to a T. Rowe Price survey. While just 34% of workers put money into an HSA in 2019, 47% are contributing in 2020. And if you're not taking advantage of an HSA, it pays to rethink your long-term savings strategy.
Why save in an HSA?
An HSA allows you to set aside funds for both immediate and long-term medical expenses. HSA contributions go in on a pre-tax basis, and any money you don't need to withdraw right away can be invested for added growth. Withdrawals for qualified medical expenses are also tax-free.
Now you may be thinking: What makes an HSA a retirement account? Isn't it a healthcare account? And that's true. But one thing you may not realize right now is that once you leave the workforce, healthcare could end up being your single largest retirement expense.
When you enroll in Medicare, you'll be subject to monthly premiums, deductibles, coinsurance costs, and copays that can add up to a whopping sum. And you may have to spend money on services that Medicare doesn't cover, like dental care. As such, funding an HSA and carrying those funds into your senior years is a great way to save for retirement -- even if you are focusing on a single expense.
Another thing you should know about HSAs is that once you turn 65, you can take a withdrawal for any reason without incurring a penalty (prior to age 65, non-medical withdrawals incur a 20% penalty). If you take a distribution for non-medical purposes, you'll be taxed on your withdrawal, the same way you'll pay taxes on a traditional IRA or 401(k) withdrawal. But this way, you get flexibility with your money.
Qualifying for an HSA
Not everyone can participate in an HSA. To contribute, you'll need to be enrolled in a high-deductible health insurance plan. In 2021, that means an individual deductible of $1,400 or more, or a family-level deductible of $2,800 or more.
Next year, HSA contributions will max out at $3,600 for individuals and $7,200 for families. Workers 55 and over will be able to make a $1,000 catch-up contribution, in addition. Note that this is not the same age that catch-ups begin in IRAs and 401(k)s -- for those accounts, they start at age 50.
The fact that HSAs are becoming more widely used is positive news. In addition to funding an IRA or 401(k), you should consider putting money into an HSA that you plan to carry into retirement. You can always dip in sooner if a medical emergency arises, but this way, you'll have a means of paying for what could easily be the most substantial retirement expense you'll grapple with.