Ok, a Health Savings Account is not quite the same as a 401(k), but here’s what they have in common. When HSA balances grow, they become a powerful financial planning tool that you can use in retirement. Health Savings Account contributions go in tax-free, grow tax-free and can be withdrawn tax-free to pay for many different types of health care.
And, you can withdraw from your HSA before and after you retire with no penalty as long as you spend the money on qualified health care. You can spend it for your family’s health care, too. And, expenses you may cover with HSA funds include dental work, acupuncture, and lots of so-called alternative therapies.
You may be thinking that “health” savings accounts can only be used for medical expenses, but there are a lot of people who use an HSA as an alternative retirement fund. You see, once you sign up for Medicare, you can withdraw money from your HSA to pay for anything. Only your health-related expenditures will remain free of taxation then, but you can buy anything with HSA money at that time and just pay taxes on the withdrawal.
So, some people invest their HSA balance and let it grow during retirement. In fact, IRS rules permit having a couple of these accounts. One can be a simple interest-earning account that’s liquid to pay for health care costs, and another one can serve as a retirement vehicle.
Right up until you retire and enroll in Medicare, you can continue making HSA contributions. These can be deducted from your paycheck before taxes are taken out, or you can make after-tax contributions and claim a tax deduction for them when you file tax returns.
For 2013, the maximum HSA contribution is $3,250 for an individual and $6,450 for a family, with an additional $1,000 catch-up contribution if you’re at least 55 years old. You see, even the IRS thinks of an HSA as a retirement plan.
IRAs, of course, are the traditional retirement accounts, but unless it’s a “hardship” withdrawal from an IRA, you’ll get a 10-percent penalty for taking IRA funds to pay for health care before you are 59 1/2. With an HSA, you can withdraw funds anytime to pay for qualified health-related expenses.
The key here is to know what’s “qualified.” You can check that out on our tax-subsidized medical expenses page. It’s good to refer to that every now and then because the penalty for spending HSA money on anything else prior to retirement has gone up to 20 percent.