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If You're Missing Out on This Retirement Savings Plan, You're Making a Big Mistake

By Maurie Backman – Jan 1, 2022 at 5:18AM

Key Points

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It may be a less obvious choice for socking funds away for your senior years.

There's a trap workers tend to fall into when planning for retirement -- assuming their living costs will drop drastically once their careers come to a close. The reality is that many seniors end up spending roughly the same amount on living expenses in retirement as they did during their working years. And a big reason boils down to an increase healthcare expenses.

Healthcare can be a burden at any age. During retirement, it can be a true budget-buster. And so it pays to specifically sock money away for your future healthcare needs.

You could do so by increasing the amount of money you put into your IRA or 401(k) plan. Or, you could take advantage of a lesser-known retirement savings tool -- a health savings account (HSA).

A person at a laptop taking notes.

Image source: Getty Images.

Why HSAs are totally worth it

Technically, an HSA isn't a retirement savings plan. You can use your money during your working years to pay for near-term medical bills.

But an HSA can easily function as a retirement plan, even if that's not its official designation. That's because HSA funds never expire. You can fund an HSA in your 20s or 30s and carry that money all the way into retirement, when you might need it the most.

Furthermore, HSAs are loaded with tax breaks -- more so than IRAs and 401(k)s. With an HSA, you get three distinct benefits:

  • Tax-free contributions.
  • Tax-free gains on the funds you don't use immediately and invest instead.
  • Tax-free withdrawals, provided that money is taken out to pay for qualified medical expenses.

Now as you might imagine, because HSAs offer so many tax benefits, there are penalties for taking withdrawals for non-healthcare purposes. But those go away once you turn 65.

In fact, come age 65, you can remove money from your HSA for any reason and only pay taxes on your withdrawals when they're not taken for healthcare purposes. This feature alone makes it reasonable to regard an HSA as a retirement savings plan.

Can you participate in an HSA?

HSAs, unfortunately, aren't open to everyone. To contribute to an HSA this year, you'll need to be enrolled in a health insurance plan with an individual deductible of $1,400 or more, or a family level deductible of $2,800 or more. Your health plan must also come with a maximum out-of-pocket amount of $7,050 for self-only coverage, and $14,100 for family coverage.

If you qualify for an HSA, your 2022 contribution limit is as follows:

  • $3,650 for self-only coverage if you're under 55.
  • $7,300 for family level coverage if you're under 55.
  • $4,650 for self-only coverage if you're 55 or older.
  • $8,300 for family level coverage if you're 55 or older.

Don't pass up a prime savings opportunity

It's not every day that you get a chance to fund a savings account that can be there for you during retirement, but also offer you access to your money sooner. With IRAs and 401(k), for example, penalties generally apply if you tap your savings before age 59 1/2.

With an HSA, you can set aside funds for near-term healthcare but also earmark that money for retirement. In fact, the best use of an HSA is to leave your money in that account alone, pay for as many near-term medical expenses out of pocket as you can, and keep your funds invested. But the knowledge that that money is there for immediate use if you need it is also reassuring.

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