if you want to supercharge your retirement savings, you’ve got to get in on this—your Health Savings Account (HSA). This may be one of the most overlooked, yet incredibly powerful tools in your financial arsenal for retirement.
HSAs can help teachers not only cover current medical expenses but also serve as a powerful component in a supplemental retirement plan, much like the better-known traditional options such as 401(k)s or IRAs.
Taking advantage of this lesser-known opportunity, many education professionals find that an HSA can assist them in preparing for future healthcare costs and enhance their retirement readiness
And here’s the secret that makes it even better: it can help you save on taxes.
From now on, you’ll no longer view HSAs solely as a way to set aside money for qualified medical expenses. Instead, you will discover they can be a valuable partner in building a more robust retirement plan.
Here’s what you are going to learn about HSAs and how to to use them effectively to enhance retirement savings for teachers:
- What an HSA is and How it Works
- Using an HSA in Your Retirement Plan
- Tax Implications of Using an HSA for Retirement
- How Teachers Can Leverage HSAs in Retirement
Understanding HSA and How it Works
A Health Savings Account (HSA) is a tax-advantaged savings account designed to help offset medical expenses for individuals with high-deductible health plans. You can contribute funds to an HSA, often on a pre-tax basis, which allows you to set aside money to cover qualified medical costs.
Contributions can then be used to cover out-of-pocket healthcare expenses, but one of the benefits is that any unused funds can be rolled over from year to year.
HSAs offer a triple tax advantage:
- Contributions are tax-deductible,
- Investments within the HSA grow tax-free,
- Withdrawals are not taxed as long as they are used for eligible medical expenses.
Additionally, these accounts can be invested in a range of securities, such as mutual funds and stocks, providing the opportunity for growth over time.
Overall, the flexibility of HSAs for managing healthcare costs and planning for future medical expenses, as well as a savings option for investments, can offer teachers some very attractive benefits.
Using an HSA in Your Retirement Plan
Teacher Retirement Plans believes that a proper understanding of investment tools can help educators develop a roadmap leading to the desired destination for the Golden Years (by the way, we have a free weekly newsletter on this topic).
Incorporating an HSA into your retirement plan is a strategic financial goal for teachers aiming to capitalize on potential tax benefits while also saving for long-term health care expenses.
To establish a solid investment plan that uses an HSA as a tool, you need to be aware that it all starts once your HSA reaches a designated balance, typically $2,000. At that point, you can choose to invest a portion of your dollars in this instrument.
HSAs vs 401(k)s and IRAs
One smart strategy—reminiscent of utilizing the tax benefits associated with retirement plans like a 401(k) or an Individual Retirement Account (IRA)—is to secure tax deductions for contributions through your HSA, allowing the money to grow tax-free until you reach retirement. In this approach, once you reach the age of 65, the funds held in an HSA can be withdrawn and used for any purpose.
For educators and other professionals opting for this plan, the only caveat is that you’ll pay regular income taxes if the withdrawals are not used for qualified medical expenses, as you’ll learn more about below.
It’s interesting to note that, even in comparison to 401(k)s and IRAs, while the amount you can contribute each year to an HSA is lower than those other options, it still provides a significant boost to retirement planning.
Like with IRAs, additional contributions are also available for HSAs beginning at age 55, allowing you to contribute an additional $1,000. However, if you need to withdraw funds before age 65 for non-qualified expenses, the amount is subject to a 20% penalty.
Still, given that you aren’t taxed on either end if HSA withdrawals are for qualified expenses, under certain conditions this might be less costly than other options mentioned. Overall, an HSA can combine the best tax features of a Roth and a tax-deferred account, as noted in a Forbes analysis.
Investing Your HSA
Using your HSA solely for savings is one thing, but when it comes to investing your HSA funds, you’ll probably want to be relatively conservative and understand where you’re going to place the hard-earned money you’ll need in the future.
This fund is primarily intended to cover the costs you’ll incur from your high-deductible health plan, so taking on too much risk with your investments is definitely not advisable.
However, once you feel you’ve saved enough to cover likely expenses for a few years, it makes no sense to let that money just sit idle when it could be earning returns.
Stocks and bonds through mutual funds or ETFs are worthy consideration for teachers who wisely invest time in building a portfolio of assets. These funds offer low operating costs and provide diversified market exposure with professional management, which makes them popular among less experienced investors, as noted by Bankrate.
For those with a higher risk tolerance who want to invest their HSA in individual stocks, there’s more required. It’s crucial to spend time researching each asset individually and to pay close attention to their performance over time.
If you are one among the more risk-averse, treating the HSA like other retirement accounts may be the safer option, which suggests keeping a significant portion of your HSA in cash. However, since HSAs also allow you to invest your savings in mutual funds and other lower-risk securities, it’s not wise to settle for a regular savings account.
Furthermore, if you pay a healthcare cost and defer the reimbursement until retirement, that value can grow several times over by the time you withdraw it, and you could still withdraw the original expense tax-free.
Tax Implications of Using an HSA for Retirement
If you wonder, “Can I withdraw money from a health savings account for non-medical expenses?” It’s crucial to understand the tax rules for these situations before making a withdrawal.
In any cases, it’s advisable to review these key points highlighted by an article on Investopedia:
- Contributions to an HSA are tax-deductible, even if you don’t itemize your taxes.
- Your account balance grows on a tax-deferred basis.
- Qualified withdrawals, meaning withdrawals for eligible medical expenses, are tax-free.
Contributions to an HSA can be made through payroll deductions or from your own funds if you’re self-employed. Employers can also make matching contributions to an HSA. The total contributions from employers and employees cannot exceed the annual contribution limit set by the IRS.
Other critical considerations that Investopedia also emphasizes when you need to use HSA funds to cover expenses beyond healthcare includes that, in all cases, you will pay income tax on these distributions. However, there’s a key distinction between two scenarios:.
- There’s a 20% tax penalty for withdrawals made before age 65 for any purpose other than eligible medical expenses.
- After age 65, you can withdraw money from an HSA without the 20% penalty, regardless of the reason, but you will still owe ordinary income tax on those funds.
Tax-Free Growth and Withdrawals with an HSA
The HSA offers tax-free growth, which is why many consider it an ideal long-term investment option.
More specifically, the HSA account is one of the few savings vehicles that allows your money to grow tax-free, with investment gains not subject to taxation. Additionally, you can withdraw your investment income-tax-free for qualified medical expenses.
For example, with a 401(k)—familiar to many public education professionals in some states—there’s always a tax when withdrawing funds. However, with an HSA, the money used for qualified medical expenses is entirely exempt from income tax.
Qualifying to Open a Health Savings Account (HSA)
Teachers and other workers can open a Health Savings Account (HSA) even if their employer doesn’t offer one. However, you can only make current-year contributions if you’re covered by an HSA-qualified health plan, also known as a high-deductible health plan (HDHP).
One important caveat: you cannot be covered by other types of insurance, such as Medicare, Medicaid, TRICARE, or a spouse’s health plan that isn’t HSA-qualified.
Healthcare.gov provides clear guidance on the steps to take when setting up an HSA. Start by enrolling in an eligible plan, then open an HSA separately by following these steps:
- Research HSA providers online.
- Check with your health insurance company to see if they partner with any financial institutions offering HSAs.
- Talk to your bank manager about an HSA option that meets your needs.
Additionally, consider these key factors when selecting an HSA provider: - Some HSAs have fees, including charges for opening or closing the account and monthly maintenance fees.
- Banking options, services, and features, such as debit cards and online banking, vary among HSA providers.
- The way you make pre-tax contributions to your HSA can also vary.
Regardless of whether you qualify for an HSA, remember that these accounts are primarily designed as health assistance plans. Before opening an HSA, determine if this option aligns with the healthcare benefits provided by your employer.
Another thing to consider is that there are different types of HSA plans offered by various institutions, each with its specific set of rules and costs. Therefore, it’s crucial to understand how these operational factors may lead to additional fees for debit cards and account maintenance.
How to Use Your HSA in Retirement
If you want to ace the test and invest wisely in your HSA as part of a plan for a more prosperous retirement, you might wonder, “How exactly will I use this money once I retire?”
Below are a few smart ways to use investments in an HSA, among others, that make sense for many retired educators:
- Prepare for long-term care costs: Medicare typically doesn’t cover the high costs associated with long-term care. If you find yourself in need of extra money for this stage of life, an HSA can act as a form of insurance.
- Withdraw for non-medical expenses: If you’ve used your HSA as an investment tool and not just for healthcare, it makes sense to consider withdrawing funds for non-healthcare expenses after turning 65.
- Bridge the gap to Medicare: For those who retire before age 65, HSA funds can be a crucial lifeline, serving their primary purpose of covering healthcare expenses, including insurance premiums, until Medicare coverage kicks in.
To Reinforce
For educators eligible for an HSA, maintaining the discipline to make regular contributions to this account can be more than just a plan to cover future medical expenses; it can also serve as a solid investment for retirement.
With medical costs often outpacing inflation by multiples, setting aside reserves for Medicare could be crucial.
If you choose to delay reimbursement for any reason and keep your receipts during your working years, exploring various investment options can potentially grow your savings over the long term.
In short, an HSA can be a versatile investment option since after turning 65, you can use the funds for any purpose beyond medical expenses.
The best part is that by integrating this tool as part of your retirement plan, the money from it can be income-tax-free on qualified withdrawals, unlike some more popular options. This can offer significant tax advantages, especially as a complement to traditional retirement accounts.
