Health Savings Accounts Are The New 401(k) Plans Healthshare

Health Savings Accounts Are The New 401(k) Plans

401kOk, 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 Health Savings Account contributions go in tax-free, grow tax-free and can be withdrawn tax-free to pay for many different types of health care.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.

Jim McFadden

I have been in the health insurance business for over 12 years.I'm passionate about Health Savings Accounts and enjoy blogging about them.I am also a husband and father of 2 beautiful children.
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  • tim holt

    The HSA plan is the ONLY way to have your health insurance set up. Love the new contribution levels for 2013!

  • Tim Holt

    Can you still use the money in the HSA account after you turn 65 and enroll in Medicare?

  • Jim McFadden

    Yes Tim! After you turn 65, you can withdraw the money from your HSA tax free for any purpose you see fit.

  • Colleen smith

    If I make a hardship withdrawl from my 401k does the 6 month hold on contributing include HSAs? My employer makes contributions to my HSA for my high deductible health care insurance, would I lose that contribution too?

  • Fred Adams

    Colleen,

    Please let me first say that I, nor HSA for America, are accountants, and nothing we say should be taken as tax advice. That said, there is no connection at all between a 401K and an HSA. The two are often compared because of the similarities of their tax savings benefits, but the rules of the two do not apply to the other.

    As with any other tax matter, it is always best to consult your CPA, perhaps the company you work for that makes your HSA contribution would be able to answer this for you. I am 100% confident in the opinion expressed above. Please let me know if you have any other questions.

    Fred Adanms

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