Millions of savers are overlooking an incredibly underrated way to add extra punch to their nest egg efforts.
The Health Savings Account available to those enrolled in a high-deductible health insurance plan is a great place to save for today’s medical expenses. But it might be an even better place to stash cash for your golden years.
Here are some key reasons to consider using an HSA to save for retirement.
1. It’s a triple tax advantage
The huge selling point of a health savings account is the fact that it has a triple tax advantage:
- You benefit from a tax deduction during the contribution year.
- The money grows tax-free.
- You withdraw the money tax-free when used for eligible healthcare expenses.
Essentially, if you use HSA money to pay for health care costs, it’s never taxed. Never.
It’s hard to think of another savings vehicle that offers such a powerful combination of tax incentives.
2. It may be a backdoor IRA
This is one of the most overlooked – and misunderstood – benefits of HSA. Many people think that the HSA to have to be used to pay medical expenses.
In fact, once you reach age 65, you can withdraw your HSA funds for any reason. Just like with a traditional IRA, you will pay taxes on the withdrawal at that time. However, you will not pay any penalty. As the IRS states in Post 969:
“Additional tax. There is an additional 20% tax on the portion of your distributions not used for eligible medical expenses. Calculate the tax on Form 8889 and file it with your Form 1040 or Form 1040NR.
Exceptions. There is no additional tax on distributions made after the date you become disabled, reach age 65 or die.
So if you use the money for eligible medical expenses, it’s never taxed. If you use it for other purposes during your retirement, you will only have to pay the same type of taxes as with an IRA withdrawal.
However – and it is crucial to note – a bill introduced in the United States House of Representatives would eliminate the possibility of withdrawing money for non-medical reasons without paying a penalty, according to CNBC.
The same bill didn’t go anywhere in 2019, but that doesn’t mean it won’t pass this time.
Over the years, the federal government has occasionally changed longstanding rules related to retirement savings and income, disrupting the financial plans of retirees who counted on those rules to remain unchanged.
If the law changed so that seniors with HSAs could no longer withdraw money without penalty for non-medical expenses, it would make the HSA considerably less valuable as a retirement account. So consider yourself warned.
3. There’s a sneaky way to avoid these taxes
If you don’t like the idea of paying taxes on unqualified withdrawals during retirement, there are things you can do to eliminate these fees. But that probably only works if you plan ahead and are a super-saver who puts off using HSA funds for many years.
Some people who open an HSA account do not use the funds to pay for routine medical expenses. Instead, they leave their HSA money alone and dip into their taxable accounts to pay annual medical expenses out of pocket.
Why the hell would you do that? Because it allows HSA money to continue compounding tax-free for years, even decades.
So every time these super savers rack up new medical expenses, they write a check to cover the bill. Then they take their medical receipts and file them quietly.
It turns out that you can claim reimbursement of your medical expenses at any time of your life. According to IRS Publication 969:
“You are entitled to receive a distribution of your HSA at any time; however, only amounts used exclusively to pay eligible medical expenses are exempt from tax.
The key phrase, of course, is “at any time”. So as long as your expense was a qualifying medical expense – and you hadn’t received a reimbursement or deduction for it before – you’re golden, even if you make a withdrawal to repay expenses incurred decades later. early.
While media such as Forbes have written about this strategy, it remains largely under the radar. You can find out exactly how to collect these medical expenses for many years by read the rules on the IRS website. Scroll down to Q&A-39 to read all about it.
Theoretically, you could decide to buy a car when you turn 65 and finance much or all of the purchase using thousands of dollars in tax-free HSA money. To do this, you just need to make sure you can produce those receipts of yesteryear.
It’s a pretty neat trick and totally legal.
4. It helps you reduce your medical costs now and in the future
Everyone knows that health care costs continue to skyrocket. An HSA can help alleviate some of these financial hardships by providing you with upfront tax relief that allows you to recoup a modest amount of these costs.
And you get that tax relief now, even if you don’t tap into your HSA funds for years in the future. Thus, HSA remains a great way to reduce ever-increasing health care costs now and in retirement.
5. It can be a great estate planning tool
When you die, your health savings account does not accompany you in the afterlife. Instead, it remains on this earth plane and can be used by loved ones to enhance their lives.
If you name a spouse as beneficiary, he or she will inherit the HSA and can use it as you did, with a right to tax-free distributions for eligible medical expenses.
If you bequeath the money to someone else, it will be distributed to your heirs and will still be fully taxable.
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