Use a Health Savings Account as a Retirement Strategy

To cover medical costs, three common methods are to simply pay for health insurance by using cash for deductibles and out-of-pocket expenses, to enroll in a Flexible Spending Account (FSA), or to contribute to a Health Savings Account (HSA). The first two options listed provide no retirement-savings strategies since FSA funds expire annually and spent cash is simply gone. An HSA is an individual account that belongs to you whether you change jobs, health insurance, or move. The funds don’t expire (in fact, they can GROW), and you have flexibility with how to spend funds if you keep the HSA long enough. Because of these reasons, it’s possible to use an HSA as part of your retirement strategy.

HSA as a Retirement Tool

When designing a retirement plan, a financial consultant will ask you to consider items such as lifestyle costs and legacy gifts so you can be sure to have the right savings vehicles to reach your goals. Wrapped into lifestyle cost are increased medical costs because as we age, there is a natural increase in doctor visits, medicines/vitamins, and supplies. Of course, in a retirement plan, you can employ the use of a Health Savings Account (HSA) to combat these medical expenses, but did you know you can also use an HSA as an investment and money-saving tool?

Health Savings Account Contributions

How Much Do I Contribute?

It's pretty easy. The IRS sets the amount you can contribute to your HSA annually (see below for 2023 amounts). If you set it up on your own, you can invest the full amount and if you have an employer-sponsored plan, the employer contributions count towards the thresholds.

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Invest = More Growth

Though annual contributions are limited by the IRS, you can choose to invest some or all of your HSA money for potential growth to help pay for qualified medical expenses in retirement.

If it grows, that growth is also tax-free.

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Age 55? No Problem: Just Catch-Up

If you're age 55 or older, it's not too late!! There are two options.

ONE: You can contribute an additional $1,000 each year as a catch-up contribution.

TWO: You can make one single IRA rollover to fund an HSA.

(More on this in the next box!)

IRA Rollover

Make a one-time IRA roll-over to fund your HSA. If you are searching for options to decrease a future required minimum distribution (RMD), consider this: In 2023, the maximum that can be rolled over from the IRA would be $8,750. That $8,750 will no longer be taxable and reduces the RMD from the IRA. Win-win!

All Good Things Come to an End

You can no longer contribute to an HSA when enrolled in ANY part of Medicare, but you can continue to take distributions and reimbursements.

Medicare & Income Levels

Health Savings Account Distributions

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Before You Retire

If using an HSA as a retirement strategy, you won't want to tap into the funds now. But if you have to, qualified medical expenses include over-the-counter drugs, PPE, and even menstrual products!

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After you Retire

Besides the normal out-of-pocket medical expenses you expect to be reimbursable, the HSA money can also be used to pay for Medicare premiums, COBRA, and Long-Term Care premiums.

Medicare Premium Overview

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After 65 Years Old

This is the really exciting news!! Non-medical distributions are PENALTY-FREE at age 65 and older! All you'll have to pay is taxes.

Use it!

There is a drawback to leaving remaining funds in your HSA as an inheritance. If given to a non-spousal beneficiary, the entire account balance must be distributed as taxable income in the year it is transferred.

2023 HSA Amounts

In late April, the IRS announced an increase for 2023 inflation-adjusted amounts for Health Savings Accounts (HSAs). The contribution limits are $3,850 for individuals for self-only coverage and $7,750 for individuals with family coverage starting on January 1, 2023. The $1,000 catch up contribution for over age 55 did not change because the catch up is not subject to inflation adjustments. These increases are much larger than we typically see. For instance from 2020 to 2021, the increase was $50 for self-only coverage and this increase is $200. Likewise, for families, the 2020 to 2021 increase was $100 and this increase is $450.

Because of these increases, and the double-use of an HSA, as both an investment and a currently-useable asset, now could be a great time to set up an HSA. If you’re interested in learning more, just contact us.

Earl Blackmon, CPA

Avizo Group offers Wealth Management for clients who would like assistance in investing, saving, and portfolio diversification. This is an area of need for many of our clients who want to invest but need someone they know and trust to help them. Earl Blackmon holds a Series 7 and Series 66 license.

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