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Why HSA's are the New Retirement Account

January 02, 2020
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Health savings accounts (HSA’s) are wonderful savings vehicles.  Unlike most other savings plans, the HSA  is triple-tax advantaged.   That means:

  • Contributions are tax deductible on the way in
  • Money grows tax-deferred within the plan
  • Distributions are tax-free on the way out (if used for qualified medical expenses)

Because of the more generous tax advantages of an HSA  compared to most retirement accounts, such as IRAs, Roth IRAs or employer retirement plans, the HSA should be utilized to the fullest extent for retirement purposes.  Most people would agree that there is generally no shortage  of medical expenses in retirement for which the HSA funds may be used!

Unfortunately, many people see the HSA as a short-term, rather long-term savings vehicle. They use up the balance of their HSA every year to pay for medical expenses incurred that year.  While there is nothing wrong with that per se,  there is a missed opportunity.  A better long-term strategy is to pay out of pocket for those current medical expenses and let your HSA money grow for many years. 

Remember, HSA’s are not the same as flexible spending accounts. Flexible spending accounts, or FSA’s for short, are “use it or lose it”, meaning the balance does not roll over every year.  But the balance in your HSA does NOT need to be used up before the end of each year.  The HSA balance will rollover every year.

For this long-term strategy to be useful, you will have to make sure that your HSA has the option to invest the funds.  Many plans have an investing option, which can generally be used once the balance of your HSA reaches a certain amount (such as $1,000 for example).

Because of the tax advantages, there are limits to how much can be contributed to an HSA each year.  In 2020 individuals can contribute up to $3,550 or up to $7,100 for a family. There is also an additional $1,000 catch-up contribution for individuals over age 55.  One thing to be mindful of however, unlike IRA’s, any amount an employer contributes into the HSA will count toward the contribution maximum.  

Who is eligible to contribute to an HSA?   An individual may only contribute to an HSA if they have a high-deductible health insurance plan. For 2020, the IRS defines a high deductible health plan as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family.  That means that if you are enrolled in Medicare, you are not eligible to contribute to an HSA.

 Retirement accounts are still a great way to save for the future.  And the contribution limits for retirement accounts are typically much higher than the contributions limits to Health Savings Accounts.  But if you are eligible and able to fully utilize both a retirement account and an HSA for long-term purposes, you absolutely should!

For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.