The Retirement Account You're Not Utilizing

Dana Maury |

A Healthcare Savings Account (HSA) is a type of savings account, which allows individuals and families that participate in a high-deductible health plan to make tax-deductible contributions that can be used to cover a wide range of qualified medical expenses in a tax-free manner. Contributions are commonly made through a payroll deduction, and often a company match, similar to a 401(k) contribution.

Account Details:

  • Contribution Limit: $3,850 for an individual ($7,750 for a family) for 2023. The limit is increasing by more than 7% to $4,150 for an individual ($8,300 for a family) in 2024.
  • Individuals aged 55 or older can make an annual catch-up contribution of $1,000.

Tax Consequences:

  • HSAs have a triple tax exemption: individual contributions are tax-deductible, investment earnings grow tax-free, and any withdrawals used for qualified medical expenses are tax-exempt.
  • No required minimum distribution, regardless of age.
  • Distributions prior to age 65 for non-qualified expenses are subject to ordinary income tax and a 20% penalty.
  • Withdrawals made after age 65 that aren’t used for medical expenses are subject to ordinary income tax.

Financial Planning Strategies:

  • If you and your family have annual medical needs (ex. you have young children that go to the pediatrician frequently or you have an existing condition that requires recurring doctor’s office visits), it could make sense to contribute to a HSA and, if nothing else, at least receive the tax deduction. If you’re able to cover your medical expenses out of pocket, contributions will accumulate within your account.
  • Once funds in the account accumulate to a certain level, generally around $2,000, excess savings can be invested into a number of different mutual fund and investment options, which offers the potential for compound growth within the account.
    • As an example, if an individual contributes the maximum amount for a family in 2023 of $7,750 and continues to contribute that same amount every year over a 35-year timeframe (assuming 7% return - conservative vs. the long-term S&P 500 return of ~ 10%)¹, then that individual would have over $1.07 million saved for medical expenses in retirement.
  • Over the long term, HSA accumulation will provide greater flexibility in meeting out-of-pocket medical expenses in a tax-efficient manner. As you age and medical expenses rise, your HSA can supplement any holes in Medicare or provide a backstop for long-term care needs.
  • If you are blessed enough to not feel the strain of increased medical costs in retirement, then you can think of your HSA as an additional IRA with no required minimum distribution.

Source: IRS Publication 969:

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1: Long-term S&P 500 return since inception