If you have an HSA or are planning on opening one, you’re in luck: The IRS has announced higher contribution limits for 2020. Starting next year, you can contribute up to $3,550 for individual coverage, or $7,100 for family coverage. And, if you’re 55 or older, you can contribute an additional $1,000 per year. You can contribute to an HSA if you have a health plan with a minimum annual deductible of $1,400 for individual coverage or $2,800 for family coverage.
You can reduce your taxable income by contributing to an HSA even if you don’t itemize your taxes. Since it’s a tax advantaged account, the higher your tax bracket, the bigger your savings. It can be a powerful retirement savings tool because you can let the funds grow tax-free for as long as you want, and then withdraw money tax free for qualified medical expenses. After you turn 65 you can withdraw funds for nonmedical uses and pay the same tax you would on withdrawals from a traditional retirement account.
While it’s helpful to contribute enough to cover your out-of-pocket medical expenses for the year, it can be better to contribute the maximum amount in order to benefit from the investment. You can create an investment strategy for your HSA just like you would with a 401(k) or IRA, and use it to help cover the rising cost of healthcare in retirement. You can shift to lower-risk investments as you get older, and rely on the account once you’ve retired and no longer receive healthcare coverage from your employer.
You’ll want to avoid using the account to pay for nonqualified expenses, as you’ll pay both a tax and a 20% penalty on withdrawals before age 65. Also keep in mind that passing on an HSA to anyone except your spouse will also pass on a tax burden: non-spouse beneficiaries will have to pay taxes on the balance the year they inherit it. So, it can be better to draw down your account balance in retirement instead of saving it for your heirs. Once you turn 65 you can’t contribute to on HSA, but you can use it to cover Medicare premiums, out-of-pocket expenses, and a portion of long-term care policy premiums.
An HSA is just one way to plan ahead for your healthcare expenses in retirement. Here at Zinnia Wealth Management, we can help you create a comprehensive retirement plan that takes your future healthcare costs into account. Click here to schedule your no cost, no obligation financial review.