If you’re enrolled in a high deductible health plan (HDHP) and are eligible for health savings … [+]
It’s no secret that Health Savings Accounts (HSAs) are designed to assist with the burden of medical expenses by allowing the account holder to contribute pre-tax dollars to fund qualified medical expenses with tax-free distributions. However, an HSA may also be used strategically in retirement planning. Some HSA account holders select to not make withdrawals from the HSA account and as an alternative treat it like one other IRA account. If you’re enrolled in a high-deductible health plan (HDHP) and are eligible for a health savings account, it is sensible to think about the advantages of such an account for retirement.
Because contributions are made to the HSA yr after yr, there may be a chance to take a position the funds to generate returns and potentially increase the general account balance. Similar to retirement accounts, HSAs have contribution limits. These limits are based on whether the high deductible medical insurance is a person policy or a family policy. A single person has a contribution cap of $4,150 in 2024, while those participating in a family plan are capped at $8,300. These limits increase by a catch-up amount of $1,000 for people age 55 and older. Unlike retirement accounts, you haven’t got to have earned income to contribute to a health savings account, so you’ll be able to reduce your tax burden even in retirement. Contributions could be made before taxes until you enroll in Medicare.
Contributions to an HSA are made with pre-tax dollars, while qualified distributions are made tax-free. The comprehensive list of eligible expenses expands with each recent laws and includes items starting from expensive medical treatments to cotton balls and dental costs to gym memberships. While qualified distributions are tax-free in any respect times, nonqualified withdrawals before age 65½ are subject to a steep 20% tax penalty along with being taxed as regular income at bizarre tax rates.
Funds within the Health Savings Account don’t should be used throughout the yr by which the contribution is made and there is no such thing as a time requirement for distributing the assets. Although HSAs can’t be used to pay employer insurance premiums or premiums for insurance purchased in the marketplace, receipts for eligible medical expenses could also be submitted indefinitely so long as they were incurred after the HSA was established. By setting aside eligible expenses for reimbursement only after retirement begins, but before age 65, those funds could be utilized in early retirement to live off of savings within the non-retirement account. This allows money to be transferred from a standard IRA or traditional 401(K) to a Roth IRA via a Roth conversion. This is refrained from moving into the next tax bracket if income is lower than throughout the working years. Even after age 65, Roth conversions can still be used as a tax planning tool because HSA withdrawals can then be made penalty-free. It’s essential to keep in mind that ineligible withdrawals will still be taxed as bizarre income and should reduce the lower tax bracket’s Roth conversion amounts.
If retirement shouldn’t be considered before age 65, contributions to an HSA should still be possible so long as Social Security and Medicare advantages usually are not received. Delaying retirement until age 65 or later can delay and maximize Social Security advantages. Once Social Security enrollment begins, enrollment in Medicare is automatic at age 65. Medicare has specific enrollment timelines and guidelines that should be followed to avoid penalties. If you proceed to work and are covered under a current job-based plan, enrolling in Medicare could be delayed until retirement without penalty.
The advantages of a health savings account could be confusing when considered alongside retirement savings, tax planning, Social Security and Medicare. Financial needs are as individual as people themselves. Advice from financial industry professionals for private, individual advice is the important thing to successful planning and implementation of a financial statement.
