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) were probably not envisioned as yet another retirement plan. However, an HSA can be used to 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 more for retirement.

What Is a Health Savings Account?

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 HSA tax-free.

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, such as visiting a doctor because you suspect the flu. Instead, an HDHP’s coverage is primarily for major expenses—costly procedures like surgeries or other medical events requiring hospitalization. In other words, you're going to pay more out of pocket to cover routine costs and major expenses up to the higher deductible.

For the calendar year 2021, HDHPs can have a deductible of no less than $1,400 for an individual plan and $2,800 for a family plan. The maximum amount of 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 may contribute to an HSA varies based on the type of plan you have, your age, and the calendar year. In 2021, contributions to an HSA covering an individual under 55 can reach up to $3,600. HSA holders can save up to $7,200 for family coverage. HSA holders 55 and older get to save an extra $1,000 each year.

These contributions are 100% nontaxable. 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 deductions 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 the tax filing deadline each year. That means you have until April 15, 2021, to make 2020 contributions to your HSA. For 2021, the deadline would be April 15, 2022. If you didn’t already max out your contributions through payroll deductions during the calendar year, you can use this extra time to make additional contributions to your HSA. 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 (before or after retirement) 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 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. Because HSA balances roll over each year, you can accumulate quite a bit of money in your account. If you accumulate more money in your HSA than you need for your medical expenses in retirement, you can withdraw your HSA money for any reason 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 by making periodic HSA contributions.

For both of these reasons, a health savings account has the potential, depending on your health care needs and expectations, to be an important part of your retirement plan. If you are maxing out your contributions to your other retirement funds, consider starting or increasing your HSA funding.