We’ve already talked a little bit about how HSAs are triple tax-advantaged. That is a huge benefit as you plan to pay for qualified medical expenses. But that’s not the only benefit of having an HSA. HSAs are also a great way to grow your money and save for retirement.
Here are the key tax benefits of an HSA:
- HSAs are triple tax-advantaged.
- You can invest funds in your HSA.
- Starting at age 65 you can spend your HSA funds on anything, without a penalty.
Benefit 1: They have a triple-tax advantage
HSA contributions are tax-free. For example, if your tax rate is 22 percent, and you contribute the maximum amount for 2022, which is $3,650 for an individual, $7,300 for a family, you could save $803 and $1,606 respectively, in tax payments. If you’re over 55 and not yet enrolled in Medicare, you can contribute an additional $1,000 per person, per year. That’s an additional $220 in tax savings.
HSAs grow tax-free. This makes HSAs a great tool to save money for the long-term, including for retirement. As you contribute money over the years you won’t be hit with tax bills along the way, so you can continue building up a nest egg for later in life.
HSA distributions for qualified healthcare expenses are tax-free. There are myriad qualified expenses, including co-pays, prescription drug costs, and your deductible. If you bought a traditional healthcare plan your annual deductible may be lower, but you would have to pay for it, and other medical expenses, with after-tax money.
Benefit 2: You can invest funds
Many people with HSAs don’t take advantage of this benefit, but it has the potential to be a key component of your financial planning. In your HSA, earnings from interest and investments are tax-free. If you are planning to contribute funds to your HSA in order to save for retirement, you may want to consider if investing some of your funds is the right option.
Of course, if you are expecting an expensive medical cost soon, it may be smart to have more liquid assets in your HSA to pay for that expense. If and how you invest depends on your goals and risk-tolerance. We recommend chatting with your financial advisor before investing. Everyone's finances are different, and they can help choose the best options for your personal situation.
Benefit 3: Starting at age 65 you can spend your funds on anything without a penalty
At any age, you can use HSA funds for qualified medical expenses tax-free. But before age 65, if you use HSA funds on non-qualified expenses, those funds will be subject to income taxes and a 20% penalty. Ouch!
Once you are 65 and older, that penalty no longer applies. That means that you can use your HSA funds for something other than a qualified healthcare expense and pay regular income tax as you would with a traditional 401(k) or IRA.
Since your money rolls over from year-to-year (there’s no “use it or lose it”), and it isn’t tied to a particular employer, an HSA can be a great way to save for retirement. You can contribute money knowing that it's likely you’ll have medical expenses come up as you age. But if you have other expenses come up during retirement, you also have those HSA funds available to use without any additional penalty.