Making the Most of Your HSA
It’s no secret that HSAs are an excellent retirement vehicle. They allow tax-free contributions, growth, and withdrawals. They are completely owned by you and can be transferred from one employer to the next. HSA funds can roll over from year to year, and you can withdraw from them for non-medical expenses by age 65 with no penalty (other than simply paying taxes). There is also an HSA catch-up contribution of $1,000 if you’re 55 or older, just like an IRA. However, the annual contribution limits for HSAs are higher than those for IRAs. So, how can you take complete advantage of these benefits? Make sure to maximize your yearly HSA contributions, leave the funds untouched for as long as possible, and above all, invest.
Maximize Your Contributions
The maximum annual HSA contributions for 2021 are $3,600 for individuals and $7,200 for families. (The annual HSA contribution limits for 2022 will be $3,650 for individuals and $7,300 for families.) Be sure to contribute these maximum amounts to your HSA each year, or as close to them as you can afford. Even if you can’t afford the maximums, it’s important that you contribute every year. If you’re married, split your HSA into two accounts. You’ll still be limited to the maximum annual family contribution, but each spouse can make an annual $1,000 catch-up contribution once they reach age 55. If you haven’t started maximizing your HSA, it’s not too late. You can start contributing at age 50 and still build quite a nest egg because those are your peak earning years. (Be aware that enrolling in Medicare makes it so that you can’t contribute to your HSA anymore.)
Leave Funds Untouched
An HSA is a great safety net for unforeseen medical expenses. That being said, if you can avoid dipping into your HSA funds and pay for your medical expenses out-of-pocket instead, you’ll be on your way to building a sturdy retirement fund. “There’s no rule that says you must pay for medical expenses directly from your HSA,” says expert Adam Levy. “You can hold onto your receipts for years or decades before reimbursing yourself from your HSA. If you can pay for your medical expenses from your regular bank account, that gives investments in your HSA more time to grow tax free.” Ideally, an HSA holder would wait until retirement to withdraw funds, as that is when withdrawal is most advantageous because the funds can be used on non-medical expenses.
An HSA’s ability to grow tax free should certainly be taken advantage of. HSA funds don’t incur taxes on interest or gains. Invest your HSA savings in mutual funds, stocks, or bonds to gain tax-free wealth. (Of course, it is always wise to set aside some funds for short-term, unanticipated healthcare costs.) Investing in your HSA not only produces rapid growth, but better growth. When your money sits in a bank account you may receive 1 or 2% interest, but when you utilize the investment funds that, for example, MotivHealth grants access to, your savings can grow exponentially. View MotivHealth investment options here.
The average couple retiring today needs $280,000 to cover the cost of healthcare throughout their retirement. This number is startling, but if you contribute the maximum yearly limits to your HSA, leave your HSA funds relatively untouched, and invest those funds, the number above will become less and less frightening.
Are you making the most of your HSA?