Health savings accounts, or HSAs, aren’t available to everyone. But for those who are enrolled in a high-deductible health insurance plan, they are worth taking advantage of.
HSAs allow you to set aside money for short-term and long-term medical expenses. Since these funds do not expire, you can keep this money until retirement if you wish and make withdrawals then, when your health care expenses are likely to be greatest.
In fact, there is a benefit in waiting to exploit your HSA. Any funds that you do not withdraw immediately can be invested and become a larger sum.
HSAs offer the advantage of being threefold tax-efficient. Contributions are tax-free, investment gains are tax-free, and withdrawals are tax-free when used for eligible medical expenses.
Now, because HSAs are loaded with tax breaks, they impose heavy penalties for non-medical withdrawals. But once you turn 65, you can withdraw funds from an HSA and use them for any purpose without being penalized. In this scenario, all that happens is that you pay taxes on the amount you withdraw.
It is for this reason that HSAs are often presented as a type of retirement savings plan. But should you save in an HSA at the expense of your IRA or 401(k)?
Don’t limit your options
While it is true that HSAs actually offer more tax advantages than IRAs and 401(k)s when used for medical purposes, they are not intended to replace an IRA or 401(k). . IRA and 401(k) plans allow you to start taking withdrawals at age 59.5. And to be clear, the only stipulation with these plans is that you wait that long to get your money. Once you reach age 59.5, these funds are yours and can be used for any purpose.
With an HSA, penalties for non-medical withdrawals will apply until age 65. But you might want to retire earlier. Where you can to have retire earlier. Many people are forced out of their jobs prematurely due to layoffs or health issues. And so, while it’s a good idea to fund an HSA, you shouldn’t overlook your IRA or 401(k) in the process, because you need access to a retirement plan that gives you the ability to take withdrawals without penalty at an earlier time. age.
Additionally, many employers who sponsor 401(k)s offer free matching dollars. And if you are aware of this arrangement, it makes sense to take advantage of it. As such, you should not put money into your HSA until you have obtained your full 401(k) match.
Now, IRAs don’t offer equivalent incentives like 401(k)s. But you should always make an effort to fund an IRA as well as an HSA, because ultimately IRAs are more flexible.
Manage your accounts wisely
Although having money in an HSA can be very useful during retirement, and HSAs offer a host of tax breaks, you shouldn’t set aside your IRA or 401(k) savings efforts. ) in favor of focusing solely on funding an HSA. But you shouldn’t neglect your HSA either. These plans can work well together to provide the financial security you need in retirement, especially since health care could become your biggest expense when you’re older.