When you’re thinking about your retirement, there are a few accounts that likely come to mind, among them the 401k, 403b, the Roth IRA, and more! However, there’s one type of retirement account that is very beneficial and often overlooked: the Health Savings Account (or HSA).
Triple Tax Advantage: Why HSAs are a Powerhouse for Retirement and Beyond
If you are working and have a high-deductible health insurance plan, in most cases you can open up an HSA or have your employer open one for you. This type of savings account doesn’t tend to be the most popular because you have to fund the account contributions from your paycheck and you can only use it for medical expenses. This can sound especially unattractive if you’re young or in your mid-years and you don’t have a lot of medical expenses to worry about.
Because of the way an HSA works, it doesn’t always feel like funding an HSA is contributing to your retirement plan. However, an HSA can be a pivotal part of your retirement as well. Keep reading to learn about the real power of a Health Savings Account and the legacy benefits that come along with it!
When you establish an HSA, you can contribute quite generously. In 2024, you can contribute up to $8,300 in a family account, that’s up from $7,200 in 2021. Individuals can contribute up to $4,150 for self-coverage. Remember, those contributions are tax deductible, so when the money goes in it lowers your taxable income! When you have money in your HSA, you can invest the money through your choice of investments, so it grows throughout the years.
Although it seems counterintuitive if you’ve been saving in a health savings account, we suggest that you don’t use these funds to cover medical expenses. So, whenever you, your spouse, or family member has medical expenses, we suggest you pay out of pocket for those costs, as opposed to writing a check from your HSA or using your HSA debit card. When you pay those medical expenses, keep track of them. You can do this by collecting and cataloging your receipts or keeping a detailed spreadsheet through the years. Continue in this manner: contributing to your HSA, funding your medical expenses out of pocket, and tracking those expenses.
Down the road (before, after or during retirement), you can give yourself a retroactive reimbursement check to cover every eligible medical expense you had when your HSA was open. If you contribute to this account generously (ideally at the maximum) and take advantage of the compound growth through investing those contributions, you’re likely to have tens of thousands, if not hundreds of thousands of dollars, by the time you retire.
Having this HSA gives you more flexibility in your retirement fund, since it is a tax-free bucket of money.
You can reimburse yourself for all those expenses and get that tax-free money. While you cannot reimburse yourself beyond your applicable expenses, you can still keep that HSA account and use it to fund medical bills and expenses, which you’re likely to have in retirement. When you pay those medical expenses out of your HSA, they are still tax-free in retirement. This means you can cover those expenses without dipping into your IRA or 401k, which could increase your adjusted gross income (AGI) and potentially push you into a higher tax bracket.
If you look at it from a high-level, it is triple-tax advantaged, since it goes in tax free, grows tax-deferred, and comes out tax free. Despite these benefits, HSAs are highly-underutilized. At REAP Financial, we recommend them to our clients who qualify to open them.
Maximizing Your HSA’s Power: Legacy Benefits and Strategies
But, what about the legacy benefits of an HSA?
If you have kids you want to pass your remaining HSA on to, you’ll want to make your trust the beneficiary of your HSA and not your kids or loved one. This is because if your trust is the beneficiary of your HSA, when the money is inherited, the estate can pay the associated taxes, instead of your loved ones.
If your child or loved one is the beneficiary of your HSA, they will have to pay tax on the money coming out of your HSA, since it wasn’t originally in their name. If they’re in high-earning positions, they’ll have to pay in a high tax bracket on top of that. Making your trust the beneficiary avoids this, by allowing your estate to pay the tax and have it pass to your heirs tax-free. Or, if you want to donate the money by contributing to a charitable cause, your HSA can be left to charities tax-free. This can enhance your charitable giving and magnify your impact.
Alternatively, if you want to give an annual gift to your children, you can contribute directly to their HSAs. In 2024, you’ll be able to contribute up to $18,000 per person per year into an HSA for loved ones and family members. If you take part of your gift and have it fund their HSA, they can take a personal tax deduction on their return, while they’re receiving a gift. These tax-free giving techniques can help you set your loved ones up for success, keep wealth in the family, and/or enhance your charitable giving. All in all, Health Savings Accounts are an often-overlooked way to get more out of your retirement, and we suggest you take advantage of it if you have the option!
Financial Advisors and Retirement Planners in Austin, Texas
REAP Financial offers a range of services tailored to the needs of high net worth individuals and families, focusing on comprehensive financial management. Our areas of expertise include wealth preservation, tax efficiency, estate planning, asset protection, and strategic charitable giving. Based in Georgetown and Austin, our team is equipped to provide personalized solutions in these key financial areas. Contact us today.
Our services include:
- Investment Planning: Developing personalized investment strategies.
- Estate Planning: Creating plans to efficiently transfer and preserve legacies.
- Tax Mitigation: Implementing strategies to reduce tax liabilities.
- Asset Protection Planning: Establishing measures to protect wealth against potential risks.
- Business Succession Planning: Facilitating smooth transitions for business ownership and management.
- Retirement Planning: Constructing plans for a secure and fulfilling retirement.
- Educational Family Planning: Educating future generations on financial management and success.
- Charitable Planning: Coordinating philanthropic activities with overall financial objectives.
These services are designed to address the complex financial challenges faced by affluent individuals and families, ensuring a holistic approach to financial management and legacy building.
