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How to coordinate a health savings account with your retirement savings plan

As people age, healthcare typically becomes one of their largest (if not THE largest) expenses. During your working years, you may have had health insurance coverage through your (or your spouse’s) employer, or via an individual policy.

It is also possible that you have or had access to a health savings account. Health savings accounts, or HSAs, are designed to help people who have high-deductible health insurance plans with paying their out-of-pocket medical expenses.

Money that is in the health savings account may be used to pay certain costs that are not covered by the high deductible health insurance plan. There are other benefits that can come with participating in an HSA, too, such as:

  • Pre-tax contributions
  • Tax-free interest and earnings
  • Tax-free withdrawals – provided that the funds are used for allowable medical expenses
  • The balance in the account can be carried forward from year to year
  • Plans are “portable” and can move with you to a new job or into retirement

Similar to retirement plans and individual retirement accounts (IRAs), health savings accounts have maximum annual contribution limits. For 2023, these are $3,850 for individuals and $7,750 for families. For those who are age 55 or over during a given year, you may be able to make an additional “catch-up” contribution of up to $1,000 per year.

If you are age 65 or over – as well as retired and on Medicare – you are no longer allowed to contribute to a health savings account. However, you can continue using the funds for your qualified medical expenses going forward.

In fact, paying healthcare expenses with HSA funds in retirement can oftentimes make more sense than taking money from an IRA or employer-sponsored retirement plan to pay them. This is particularly so with regard to traditional retirement savings plans, because withdrawals made from traditional IRAs and retirement plans are usually 100% taxable, whereas qualified withdrawals from HSAs are tax-free.

In addition, unlike traditional IRAs and retirement plans, there are no required minimum distributions mandated with health savings accounts. Therefore, the money in these accounts can continue to grow and compound over time.

Using HSAs as Powerful Retirement Savings Vehicles

Those who are age 65 and over are not limited to only using money from a health savings account for direct medical and healthcare-related costs. For instance, you could use your HSA funds for a wide variety of needs, such as:

  • In-home nursing care
  • Retirement community fees
  • Nursing home care
  • Meals and lodging that are necessary when getting medical care away from home
  • Home modifications (such as wheelchair ramps, grab bars, etc.)
  • Eye exams and eyeglasses
  • Medicare premiums
  • Hearing aids
  • Some long-term care insurance policy premiums

*Note that funds that are withdrawn for non-medical expenses may be taxed at your then-current ordinary income tax rate.

Coordinating Your Health Savings Account with Your Other Retirement Resources

If you have a health savings account, you may want to consider investing at least a portion of the funds in an asset mix that works in conjunction with your other retirement savings and assets.

Because health savings accounts are one of the most tax-efficient savings vehicles available, you may also wish to contribute the maximum allowable amount to it each year – and then use money from other sources to pay for out-of-pocket healthcare expenses so that the HSA funds can continue to compound tax-free.

As an added bonus, you can name a beneficiary to receive any funds that remain in your health savings account after your death – and if the recipient is your spouse, he or she can treat the HSA as their own and continue to receive the same tax advantages with this money.

If you would like more information on coordinating a health savings account with your retirement income plan, talk to the specialists at Annuity Gator. Our experts place a key focus on retirement income and related needs.

So, if you have questions or want to learn more, contact us directly by calling (888) 440-2468 or you can send us an email through our secure online contact form. We look forward to assisting you.

Retirement Uses for Your Health Savings Account (HSA). By Amy Fontinelle. November 20, 2022. Investopedia.

How to coordinate a health savings account with your retirement savings plan

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