Did you know that a Health Savings Account (HSA) can help you prepare for retirement?HSAs were originally designed to help participants pay for out-of-pocket medical expenses, but the tax advantages they provide have inspired a new wave of people to use HSAs for retirement. After age 65, participants can begin to use their HSAs to help with various retirement needs.

Below are a few examples of how an HSA can be put to good use.  

Health Expenses

As you grow older, you are likely to face increasing health care expenses. Your HSA can be used as a savings vehicle to help offset qualified health care expenses after retirement. If you elect Medicare coverage after you turn 65, you may no longer contribute to your HSA, but you can still use your HSA to pay for qualified health care expenses. Learn more about planning for health coverage after retirement.

Savings Account

One benefit to your HSA is that it can be treated as a savings account. Unlike a Healthcare Flexible Spending Account, your funds don’t expire at the end of your plan year and can continue to be saved. If you withdraw funds before 65 for non-qualified expenses, you are required to pay a penalty. After the age of 65, you will be able to withdraw funds for non-medical purposes penalty-free, but you will still be expected to pay state and federal taxes. 

Investing Your HSA

If you have saved enough to establish a cushion in your HSA to pay for medical needs, consider investing the remaining amount if permitted by your HSA custodian. With HSAs provided by American Fidelity, a minimum balance of $2,500 must be maintained in the HSA before investing.

The option for tax-free growth in your HSA can help fortify your savings for retirement, and like other investment strategies, you choose how conservative or aggressive you want to be.

For example, imagine a family invests the maximum family contribution amount of $7,0001 for 30 years, receiving a hypothetical 7% annual rate of return. If the family never spent any of their HSA funds, they would have over $700k accrued in their HSA account. If the family chose not to invest their funds, they would still have over $200k in their account but would have missed the potential to grow the account even more.

Estate Planning

In the case that you do not spend your entire HSA, you can pass your HSA funds on to your heirs. There are generally three categories considered that determine how HSA assets are treated upon death, including if the spouse is the designated beneficiary, if the spouse is not the designated beneficiary, and if the estate is the beneficiary. 

Your estate planning attorney will be able to provide guidance for how to designate HSA funds after your death.

Maximize Your HSA

While HSAs are growing in popularity, they remain an underutilized tool considering the advantages they offer. As you learn about the benefits you have available, consider how an HSA could help you prepare for your future. 

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1 The 2019 contribution limit is $7,000 for family plans.