We’re often told to save for retirement, especially since pensions are a rarity these days and Social Security doesn’t provide enough income to sustain the average senior. When we think about socking away funds for the future, it’s common to focus on popular savings plans such as IRAs and 401(k)s.
Both plans offer a host of tax benefits. In the case of traditional IRAs and 401(k)s, funds are contributed pretax to generate instant savings. Investment gains are tax-deferred until retirement, when withdrawals are taxed. Roth IRAs and 401(k)s work the opposite way. Though they don’t offer immediate tax savings, they do allow for tax-free investment growth, and withdrawals in retirement are taken tax-free.
There’s another type of savings account you should consider when planning for your senior years: the health savings account, or HSA. Like IRAs and 401(k)s, there are a number of tax benefits to be reaped when you save in an HSA – yet most middle-aged and older Americans don’t have one.
In a survey by TD Ameritrade, only 16% of U.S. adults in their 40s have an HSA. The same holds true for 15% of those in their 50s and 8% of those in their 60s. That means the majority of Americans of these ages miss out on an opportunity to set themselves up for a financially secure future.
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The beauty of HSAs
What’s so great about HSAs? For one thing, they’re triple tax-advantaged. The money you put into an HSA is contributed tax-free, as is the case for a traditional IRA or 401(k), and though you’re allowed to use your HSA funds right away to pay for near-term medical expenses, you can also leave funds in your account and invest the money you’re not using. Any gains you snag in your HSA will then be tax-free, and withdrawals from that account are tax-free as well, just like a Roth IRA or 401(k).
This assumes that you use that money for qualified medical expenses. If you don’t, there are taxes and penalties involved. Seeing as how health care is both an unavoidable and monumental expense for seniors, having excess funds in your HSA is a problem you’d be lucky to have.
HSA funds don’t expire. It’s easy to confuse HSAs with flexible spending accounts (FSAs), which force you to spend down your plan balance year after year or otherwise forfeit your money. HSAs are far more flexible, so much so that you can fund an account today and carry that money all the way into retirement, when you’re likely to need it the most.
The only catch regarding HSAs is that eligibility hinges on being enrolled in a high-deductible health insurance plan, defined as one with an annual deductible of at least $1,400 for individual coverage or $2,800 for family coverage. If you do qualify to contribute to an HSA, you can put in up to $3,550 this year on your own behalf or up to $7,100 on behalf of a family. If you’re 55 or older, you get a $1,000 catch-up contribution, similar to the catch-ups IRAs and 401(k)s allow.
The average healthy 65-year-old couple is likely to spend an almost alarming $387,644 on medical care throughout retirement, and that figure doesn’t even account for long-term care. If an HSA isn’t part of your retirement plan, see if your employer offers one, or open one independently. By not funding an HSA, you’ll miss out on an opportunity to save for health care expenses in the most tax-efficient way possible, and that’s a decision you’re more likely than not to regret.
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