A Health Savings Account (HSA) are for those enrolled in a qualifying high deductible health plan (HDHP). HSA’s allow taxpayers to deduct their contributions and not pay taxes on the money when it is used to pay for qualified medical costs. So what does this have to do with retirement savings you ask?
There is no limit on how much money you can have in an HSA, just an annual contribution limit based on whether you have individual or family coverage. The 2018 limits are $3,450 for single coverage and $6,900 for family coverage. This allows some savvy investors to take advantage of this double benefit by contributing more than what is required to pay medical bills during the year and invest the carryover. Once you go on Medicare, you can no longer make contributions to an HSA. However, the money already in an HSA is allowed to stay and grow until you need it.
The end result allows you to take the tax deductions when you put the money in, allows the money to grow tax deferred, and not pay taxes when used to pay medical expenses.
Fidelity investments estimated in 2015 that the average 65 year old couple will spend $245,000 in medical costs during their remaining life expectancy. A couple starting to contribute $2,000 a year in excess of medical costs beginning when they are 45 would have roughly $91,000 when they turn 65 and go on Medicare, assuming an 8% annual return.
Investing in an HSA is not intended to replace your IRA or 401k, but considering the tax advantages, you should consider it as part of your retirement planning.
Posted by Nathan Thieneman, CPA, CFE