We have reached our third and final installment of our three part series on HSAs. In this article we discuss the advantages HSAs provide account holders into their retirement years. If you missed part1 explaining how HSAs work or part 2 emphasizing the importance of saving with an HSA, we encourage you to go back and read those articles as well.
We have already discussed how HSAs can provide for unique investment and savings opportunities for account holders. But beyond this, is the potential they have as a great alternative to saving for retirement. Traditionally, employees contribute to a retirement fund, like a 401k, before they contribute to an HSA; but recently there has been a rise in recommendations for individuals to consider contributing to an HSA before a retirement fund. The reasons for doing so are compelling.
First, the tax breaks that are built into an HSA (tax free contributions, earnings and qualified distributions), coupled with the fact that account balances roll over year to year since there is no use or lose rule, make setting money aside into an HSA extremely attractive.
Second, the ability to use HSA funds to pay for healthcare expenses at any time without penalty or taxes. A 401k does not offer this advantage. Here’s an example to help point out this difference: let’s say you need to take a distribution from a 401k to pay for an unexpected health care expense. In this unfortunate scenario, not only would the distribution be taxed, it would also be assessed an early withdrawal penalty on top of that. And even when you have reached retirement age, a distribution from a 401k for any purpose would still be taxed. In contrast, distributions from an HSA to pay for eligible health care expenses are never penalized or taxed.
Third, a lesser known but powerful advantage is the fact that funds in an HSA can be used for any purpose without penalty once the account holder reaches retirement age. HSAs essentially turn into IRAs in that account holders can withdraw funds for any purpose without penalty! Funds can be used on vacations, gifts for family, fine wines, or whatever else is needed to elevate life after retirement. Tax will be owed on any non-qualified health related distributions taken from HSAs but the 20% penalty for distributions prior to retirement age will no longer apply.
Health Savings Accounts are quickly rising in popularity, we implore account holders to see the value they have to positively impact their entire lives; from the day they open their accounts long into their retirement.
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