The average couple will need $315,000 for healthcare costs in retirement. Knowing that healthcare is often such a large expense later in life, your HSA can play a major role in your retirement savings. And besides healthcare costs, if you plan ahead, you can also use your HSA funds to pay yourself without penalty.
Funding your HSA for retirement savings
HSAs are extremely tax efficient, making them an ideal way to create long-term savings. And with the power of investments, you can watch your HSA balance increase with tax-free growth.
If you can afford to do so, it’s smart to pay for health-related expenses and delay reimbursement — letting your funds grow until later when you are retired.
The year you turn 55, you are also allowed to make additional “catch-up” contributions of $1,000 per year, beyond the typical contribution limit. This means you can really pack in extra savings in your later pre-retirement years.
Delaying reimbursement
And as we like to remind you often, you can use your HSA to “pay yourself” by reimbursing yourself for any past expenses you paid out of pocket (and saved receipts for). If you purposely delay reimbursement, you can let your HSA funds grow year over year, and then have a bank of possible reimbursements from the receipts you’ve saved.
If you want or need to withdraw funds for early retirement, this ability to pay yourself back for past expenses is a penalty-free way to start using that money — even when you might not have reached the age qualifications for other kinds of retirement accounts.
Using HSA money when you’re retired
When you are retired, you can use your HSA funds tax-free for qualified health-related expenses just like you have previously. In addition, you can use your HSA for Medicare premiums and long-term care insurance, as well as COBRA premiums, if you are eligible.
You can also draw HSA funds for non-qualified expenses after age 65 if you need to, but you will pay taxes. The same applies if you don’t have receipts for health-related expenses, meaning saving and organizing your receipts over the years really is key, such as with the HSA Store Expense Dashboard.
I have $10k to save: HSA, IRA, or 401(k)?
If you are fortunate enough to have some extra money to stash away, you might be thinking about how to best use it toward retirement planning. You may be able to put extra money toward an HSA, IRA, or 401k — which should you choose?
Though you can fund multiple accounts, a smart plan is to maximize your HSA funding first because of the flexibility and tax benefits. If you have an extra $10k, aim to first add as much as it takes to max out your HSA contribution limit for the year. Then, you can put however much you have left into other retirement accounts — like a 401k if you have one available to you, or an IRA.
There’s one big “unless”: if your employer offers a 401k match, max that out first because that is free money to you! Then allocate what you have left to your HSA.
When you put your extra money in your HSA, you get a tax advantage from that contribution, plus you can later use that money tax-free for health-related expenses. Or like we’ve noted above, you can use your HSA for early retirement funds! Putting extra money into your HSA first gives you a lot of flexibility.
Summary: Delaying HSA reimbursements as a retirement strategy
Letting money grow in your HSA rather than reimbursing yourself right away is smart for being able to use that money later in life when health expenses are often higher.
Saving receipts for eligible expenses over time creates many options for you to reimburse yourself and “pay yourself” later, when you need money. This is a strategy some people use for penalty-free early retirement.
If you need your HSA funds for non-healthcare expenses, you can use them, but you will pay a penalty and ordinary taxes. After age 65, you will only pay taxes and no penalty.
Maxing out your HSA before other accounts is smart because of the tax benefits. However, if your employer offers 401k matching, max that account first to take advantage of free money for you.
