Is an HSA Another Retirement Plan?

How a health savings account can boost your retirement savings

Doctor in lab coat holding a piggy bank
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Health savings accounts (HSAs) didn't start out as yet another retirement plan per se, but they can be used to help you reach your retirement goals. They primarily provide a tax advantage while paying medical expenses, but healthier individuals might find that a health savings account also enables them to save more for retirement.

What Is a Health Savings Account?

An HSA is a fund that certain individuals can establish for their future medical expenses. They must be covered by a high-deductible health plan (HDHP) in order to be eligible to create an HSA. HDHPs often cost less than traditional health insurance plans, so people have the option of using the premium savings to fund their HSA tax-free.

What Is a High-Deductible Health Plan?

An HDHP doesn’t provide much in the way of coverage for routine medical expenses, such as visiting a doctor because you suspect you have the flu. Its coverage is primarily for major expenses—costly procedures like surgeries or other medical events that require hospitalization. You'll pay more out of pocket to cover routine costs and major expenses up to the higher deductible.

HDHPs can have a deductible of no less than $1,400 for an individual plan and $2,800 for a family plan as of 2021. The maximum out-of-pocket limits are $7,000 (individual) and $14,000 (individual and family).

How Much Can You Contribute to an HSA?

The amount you can contribute to an HSA varies based on the type of plan you have, your age, and the calendar year. Contributions to an HSA covering an individual under 55 can reach up to $3,600 in 2021. HSA owners can save up to $7,200 for family coverage. HSA owners age 55 and older get to save an additional $1,000 each year.

These contributions are 100% nontaxable. An HSA contribution results in an above-the-line tax deduction on your tax return. You don't have to itemize your deductions 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 the tax filing deadline each year. That means you have until May 17, 2021, to make 2020 contributions to your HSA. For 2021, the deadline would be April 15, 2022.

The IRS has extended the 2021 tax filing deadline from April 15 to May 17 in 2021 in response to the effect the ongoing COVID-19 pandemic is having on taxpayers.

You can use this extra time to make additional contributions to your HSA if you didn’t already maximize your contributions through payroll deductions during the calendar year. You would have to make direct contributions to an HSA account by writing a check or setting up automatic transfers from your bank account to take advantage of this tax-saving opportunity.

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 (before or after retirement) can be paid for with the money (and any earnings) in your HSA. No tax is due on such payments. You effectively receive tax-free growth on the money you contribute to your HSA that's eventually used for medical expenses.

The second major benefit of an HSA occurs if you're fortunate enough to be relatively healthy. Because HSA balances roll over each year, you can accumulate quite a bit of money in your account. You can withdraw your HSA money for any reason after age 65 with no penalty if you accumulate more money in the account than you need for your medical expenses in retirement. You’ll only pay ordinary income tax, as you would with a regular IRA distribution. You would have effectively benefited from a much larger than normal IRA contribution limit by making periodic HSA contributions.

A health savings account has the potential to be an important part of your retirement plan for these reasons, depending on your health care needs and your expectations. Consider starting or increasing your HSA funding if you're maximizing your contributions to your other retirement savings.