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Health Savings Account (HSA) and Its Impact on Savings for Retirement

Saving for retirement is one of the most important financial decisions people should take as soon as they can in their careers. It is always best to start early to ensure that one builds a substantial corpus for their retirement that can withstand major expenses originating from factors such as inflation, medical care, and life expectancy.

While there are many ways to save for retirement, a Health Savings Account (HSA) is one of the most overlooked yet useful plans, especially with the rising health insurance premiums and medical expenses.

What is a Health Savings Account?

  • An HAS is a savings plan for your medical expenses, before and after retirement. It is a great investment and health care plan as it covers aspects of medical expenses that are left out by Medicare.

  • The biggest perk of an HSA is that it is a triple tax saving account. It is very similar to the 401(K) and Individual Retirement Account and, in case you are maxing out on these plans, you can always add an HSA to your retirement portfolio.

  • A contribution up to $3,500 can be made by a single person and $7,000 by a married couple. In addition to this amount, a contribution of another $1,000 can be made by individuals above the age of 55 as a catch-up contribution. However, the total contribution per annum cannot exceed $9,000 as a family.

What are the benefits of a Health Savings Account?

An HSA offers many useful features and provisions. Such as:

  • First and foremost, since an HSA is a triple tax saving plan, you do not pay taxes on the funds that you put in the account every year. There are two ways of making contributions towards your HSA. The first method is when the fund is directly deducted from your pay check, through a pre-tax payroll deduction set up by your employer. The other is when you make the deposit on your own and claim a tax deduction at the end of the year when you file your taxes.

  • Under the triple tax saving plan, the interest gained on the funds invested in an HSA is not taxable. This makes it one of the most beneficial tax-free plans to add to your retirement portfolio.

  • When you use the fund to pay for your qualified medical expenses, there are no taxes or penalties levied on it. This makes an HSA the best choice for covering health costs, especially after retirement.

  • Just like in the case of an IRA, you can use the funds from your HSA fund after the age of 65 to pay for anything without incurring a penalty. However, the fund is taxable if it is spent on anything apart from your qualified health expenses.

  • Your HSA is completely yours. It is not impacted if you quit or change your job. Once you join another employer, you can simply roll it over in their HSA account, or let the account be if they do not offer an HSA. Regardless of your employer’s contributions, the funds in it are yours to use for any medical emergency.

  • The HSA fund is very flexible. If you have not used your funds from the account in any given year, the amount will be rolled over to the next year. Moreover, the savings account does not expire if you decide to stop putting money into it.

  • In case of any immediate resources required for an unplanned medical emergency, your HSA fund steps in to cover your out of pocket expenses, thus leaving your emergency funds untouched.

What are the drawbacks of a Health Savings Account?

Just like any other savings or investment option, an HSA too can have some disadvantages, such as:

  • Not every person is eligible to apply for this plan. To be eligible, you need to have a High Deductible Health Plan (HDHP) in place and only through this can you add an HSA to your portfolio. HDHP and HSA are known to be better suited for young and healthy individuals, who do not foresee any need to spend on health care any time soon.

  • Not all employers are on board with an HSA right now. So, the monetary benefits that you could otherwise gain from your employer's contribution towards your principal amount can take a hit.

  • There are some exceptions to who can apply for an HSA. You are not eligible if you are above the age of 65, as this makes you qualified for Medicare. You are also not eligible if an individual has claimed you as their dependent for tax purposes.

  • With a limit of $3,500 for a single person and $7,000 for a married couple, the account can be a little restrictive if you wish to make bigger annual contributions. This results in lowered tax advantages and smaller balances.

  • An HSA provides a lower rate of interest as compared to banks. This turns out to be a deterrent in substantially growing your HSA corpus over the years.

To sum it up

A Health Savings Account is a great investment plan to have in your retirement portfolio. With triple tax benefits and minimal risks, it is one of the most worthwhile investment options. It helps you cover your out of pocket medical expenses like the ones left that are left out of Medicare and some health insurance policies. However, it is the most beneficial if your employer is making a contribution towards your HSA account too. But even if they aren’t, it should not deter your plans to invest in it, especially if you are maxing out on your 401(K) and IRA contributions every year. With the changing healthcare landscape and the staggering sum of money required to see you through medical emergencies, an HSA turns out to be a great investment option coupled with great tax benefits.

If you need help to understand how you can begin investing in an HSA or how you should manage your contributions towards it, you can reach out to Financial Advisor.

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