Planning for retirement can be overwhelming. You never know what will happen in the future, but you want to ensure sustainable income when you're no longer working. While standard 401(k) and individual retirement accounts (IRAs) are the go-to for most people when planning retirement, other options exist.
One less conventional choice is a health savings account (HSA). HSAs are special savings accounts designed to help people pay for qualified medical expenses. However, more are using them as an additional retirement fund, supplementing other plans to maximize retirement income.
What is an HSA?
An HSA is a savings account with three tax advantages. All the money you contribute up to the annual limit is either pre-tax or tax-deductible. Health savings account companies can also invest your funds for long-term, tax-deferred growth. Finally, anything you use towards qualified medical expenses is tax-free.
The beauty of an HSA is that it can stay with you throughout your life. Many people open an HSA when they're young, making contributions for decades. Pair that long-term funding with long-term growth; your HSA funds can be substantial when you reach retirement age.
There are some restrictions. For example, you can only open and fund an HSA with a high-deductible health plan and no other coverage. Fortunately, you can still request withdrawals for qualified expenses if you change policies and no longer have an HDHP. But you can't make any more contributions.
There are also contribution limits every year. In 2024, the limit for individuals is $4,150. For families, it's $8,300.
Why HSAs Make Great Retirement Funds
HSAs work similarly to traditional retirement plans. However, you can only use the funds to pay for qualified medical expenses. That includes doctor visits, prescription drugs, many over-the-counter products, etc. Using the money in your HSA for anything other than expenses approved by the IRA leads to steep penalties and taxes.
But once you turn 65, the penalties no longer apply. That means you can withdraw the funds in your HSA for any reason. Qualified medical expenses are still tax-free. But After 65 years old, the IRS treats nonmedical withdrawals as ordinary income. So, you'll have to pay income taxes on the amount.
It works like distributions from a 401(k) or IRA. If you're looking for another way to save for retirement, consider contacting health savings account companies. Your contributions now can pay off handsomely when you retire.
Author Resource:-
Daniel Stewart has been helping people with their money management and personal finance with over 15 years’ experience in business finance. You can find his thoughts at savings guide blog.