A Health Savings Account is a valuable retirement strategy
Very few people realize that a Health Savings Account (HSA) may be the ultimate retirement account.
The HSA was initially established to help people pay for medical expenses. Because it was called Health Savings Account, many people often assume it is only useful as a method of tax savings related to medical expenses. However, an HSA has maybe your best option for a retirement account.
No other retirement gives you the advantage of a tax deduction for contributions, tax-free growth, and tax-free distributions. An IRA provides a tax deduction but has the disadvantage of being taxable when the money is withdrawn. ROTH IRA distributions are tax-free after five years but have the disadvantage of not providing a tax deduction.
An HSA is also a valuable strategy for deducting medical expenses. It’s a tax-advantaged medical savings account for people with a high-deductible. An HSA requires a minimum annual deductible of $1,400 for self-only coverage and $2,800 for family coverage. It also requires a maximum annual deductible of no more than $7,050 for self-only coverage and $14,100 for family coverage.
A high-deductible health plan is a good strategy if you don’t require much medical care. However, an HSA may not be your best strategy if you or your family have substantial medical expenses.
Many employers offer HSAs and high-deductible health plans as a fringe benefit. If your employer doesn’t provide health benefits or you are self-employed, you can open an HSA. You will need to find an HSA provider, which can be an insurance company, broker, bank, or credit union.
You can enroll in an HSA-qualified high-deductible plan through your Affordable Care Act health insurance exchange.
You can’t open a new HSA when you are on Medicare. However, you can keep an existing HSA when you enroll in Medicare.
Since an HSA has the best tax benefits, you should contribute the maximum amount each year before putting any money into an IRA or 401K. In 2022, the HSA contribution limits are $3,650 for individual coverage and $7,300 for family coverage.
A family that contributes the maximum HSA contribution for 30 years will have almost $1 million after 30 years, with an annual 7 percent growth rate. A couple that opens an HSA at 50 could have a balance of over $200,000 in their account by the time they are 65.
Another benefit of an HSA is that you are not required to take minimum distributions, unlike other IRAs.
Don’t overlook the advantages of an HSA when creating your retirement strategy.
David Zubler is a tax accountant and Enrolled Agent in East Tennessee, providing tax strategies and representing clients before the IRS and has over 25 years of tax experience. He is the author of six tax books and has shared tax advice on national TV. He is the founder and president of Your Tax Care. The company provides business and tax education, including David’s one-minute tax tip radio recordings at YourTaxCare.com. David can be reached at (865) 363-3019 or contacted by email at firstname.lastname@example.org.