A Health Savings Account (HSA) can be an incredibly powerful tool when it comes to helping you cover your healthcare-related expenses. It gets that power because it operates in a triple-tax-advantaged way when used to cover qualified costs.
- Money you deposit in the account goes in pre-tax;
- The money in the account grows tax-deferred as long as it stays in the HSA;
- Money you withdraw from the account to cover qualifying healthcare expenses comes out tax-free.
But HSAs can be powerful tools when it comes to your retirement as well. Here are four HSA benefits you won't want to miss out on in retirement.
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No. 1: HSA funds can be used to cover some Medicare premiums
If you have money in your HSA once you reach Medicare eligibility, you can use that money tax-free to cover your Medicare Part B, Part D, and Advantage premiums. However, you can't use HSA money to cover Medicare supplemental premiums. As a result, you'll need to be careful to keep track of how much you're spending toward which type of insurance if you take advantage of this opportunity.
No. 2: Your HSA can still be used to cover your out-of-pocket healthcare costs
Once your money is in your Health Savings Account, it can be withdrawn to cover any actual healthcare cost you face, no matter how old you are. This can be particularly helpful as you get deeper into your senior years, as healthcare is one of the areas where costs tend to increase the most as people age.
No. 3: Your HSA can act similarly to a traditional IRA once you're at least 65
If you happen to still have a substantial balance in your HSA when you turn 65, you can start withdrawing the money from that account to use for any purpose, and have it taxed similarly to a withdrawal from a traditional IRA. In essence, you'll pay ordinary income taxes on those withdrawals (other than for qualifying healthcare purposes), but you'll no longer be subject to penalties once you hit 65.
No. 4: Your HSA can potentially be part of an early retirement strategy
Once you have established your HSA, you can take money out of the account for any medical expense you have from that time on, at any time after you face it. You don't need to take the money out in the same year -- or even decade -- that you face the cost. Indeed, as long as you keep good records, you can pay your medical expenses out of pocket, then reimburse yourself from your HSA, at any time in the future.
This can be an incredibly useful part of an early retirement strategy, particularly since HSAs can only be contributed to by people who are covered by high-deductible health insurance plans. Because of this, people with HSAs are likely to face the first few thousand dollars -- at least -- of any actual healthcare costs that they face each year.
As a result, if you're able to delay reimbursing yourself from your HSA, you can potentially have a decent chunk of money available to you, completely tax-free, to help with an early retirement.
Get started now to have a strong HSA when you retire
As wonderful as these HSA benefits can be once you retire, the reality is that to get any substantial value from them requires years of planning, funding, and compounding. You'll never again have more time before you retire than you do right now, so make today the day you start building your plan to take advantage of the retirement benefits that your HSA can offer.
