Is An HSA Another Retirement Plan?

How a health savings account can be used to increase your savings

Doctor in lab coat holding a piggy bank
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When it was created, a Health Savings Account (HSA) was probably not envisioned as yet another retirement plan. However, an HSA might help you reach your retirement goals. Although an HSA is primarily a tool to garner a tax advantage while paying medical expenses, healthier individuals may find that a Health Savings Account also enables them to save even more for retirement.

What is a Health Savings Account (HSA)?

An HSA is a fund certain individuals may establish for their future medical expenses. In order to be eligible to create an HSA, an individual must be covered by a High Deductible Health Plan (HDHP). Since HDHPs often cost less than traditional health insurance, people can theoretically use the premium savings to fund their HSAs.

What is a High Deductible Health Plan?

An HDHP is a plan that doesn’t provide much in the way of coverage for routine medical expenses like visiting a doctor because you suspect the flu. Instead, an HDHP’s coverage is primarily for major expenses such as costly procedures like surgeries or other medical events requiring hospitalization.

Specifically, HDHPs as of this writing in 2016 can have a deductible of no less than $1,300 for an individual plan and $2,600 for an individual plus family plan. The maximum amount out-of-pocket limits are $6,550 (individual) and $13,100 (individual and family).

How Much Can You Contribute to an HSA?

The amount you may contribute to an HSA varies based on the type of plan you have, your age, and the calendar year. In 2016, for example, contributions to an HSA covering an individual under 55 can reach up to $3,350. HSA holders can save up to $6,750 for family coverage. HSA holders 55 and older get to save an extra $1,000 which means $4,350 for an individual and $7,750 for a family – and these contributions are 100% tax deductible from gross income. An HSA contribution results in an above-the-line tax deduction on the tax return. As such, an individual does not need to have itemized in order to receive a tax advantage from an HSA contribution.

When is the Deadline to Make a Contribution to an HSA?

HSA contributions can be made until April 15, 2017, for the 2016 tax year. You have until the tax filing deadline (not including any extensions) to make extra contributions to your HSA if you didn’t already max out your contributions through payroll deductions during the calendar year. In order to take advantage of this tax saving opportunity, you would need to make direct contributions to an HSA account by directly writing a check or setting up automatic transfers from your bank account.

How an HSA Can Assist in Your Retirement Planning

An HSA can help you reach your retirement planning objectives in two primary ways. First, all medical expenses you incur may be paid for with the money (and any earnings) in your HSA. No tax is due on such payments. In effect, you receive tax-free growth (like a Roth IRA provides) on the money you contribute to your HSA that is eventually used for medical expenses.

The second major potential benefit of an HSA occurs if you are fortunate enough to be relatively healthy. If you accumulate significant money in your HSA such that you do not think you will use it for medical expenses, you can withdraw your HSA money during retirement (after age 65) with no penalty. Upon such distribution, you’ll only need to pay ordinary income tax, as you would with a regular IRA distribution. Effectively, you would have benefited from a much larger than normal IRA contribution limit when you made your periodic HSA contributions.

For both of these reasons, an HSA has the potential, depending on your health care needs and expectations, to be an important part of your retirement plan.