Healthcare is something that tends to catch retirees off guard -- namely because of how expensive it has the potential to be. That's why it's so important to save for healthcare ahead of retirement. While you could do so by padding your IRA or 401(k) contributions, you may find it beneficial to save in an account that's earmarked specifically for healthcare expenses -- a health savings account, or HSA.
HSAs do not have to be reserved for retirement. You can fund an HSA today and withdraw money at any time to cover qualified healthcare expenses.
Recent data from Bank of America shows that HSA balances increased in 2023. However, it's important to not only try to grow your balance, but also manage it wisely.
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Are you taking the right approach to your HSA?
As of the end of 2023, the average HSA balance was $4,380. That's up from $3,930 at the end of 2022.
If you have an HSA, it's a great thing to contribute more each year than you did the last year. And since HSA contribution limits tend to increase from one year to the next, it's possible to do that even if you're already maxing out.
But you don't simply want to keep funding your HSA and call it a day. Rather, you'll want to make sure you're investing the funds you aren't using right away so your money grows into a larger sum over time. Not only that, but you should actually make an effort to pay for near-term medical bills out of pocket to reserve your HSA balance specifically for retirement.
That may seem like a silly thing to do. Why dip into your bank account when you have money in an HSA that's earmarked for healthcare bills?
But the reason is that the longer you leave your HSA balance untapped, the more your balance can grow. Your healthcare expenses are also likely to be higher in retirement than they are today, assuming you're not grappling with a significant medical issue at present. So it's a good idea to set that money aside for a time when you're even more likely to need it.
Check your eligibility every year
HSA eligibility hinges on being enrolled in a compatible health plan. Even if you weren't able to fund an HSA in years past, it doesn't mean that you can't do so at present. It's a good idea to check for eligibility every year.
In 2024, you're eligible for an HSA if your health plan has:
- A minimum deductible of $1,600 for self-only coverage or $3,200 for family coverage
- An out-of-pocket maximum of $8,050 for self-only coverage or $16,100 for family coverage
If you change jobs -- and health plans -- midway through the year, check up on your eligibility at that point, too.
HSAs are a super valuable savings tool because of the many tax breaks they offer. Contributions go in tax-free, investment gains are tax-free, and withdrawals are tax-free when used for qualified medical expenses. You'll be hard-pressed to find another plan that packs that many tax benefits into a single savings option.
FAQs
As of the end of 2023, the average HSA balance was $4,380. That's up from $3,930 at the end of 2022. If you have an HSA, it's a great thing to contribute more each year than you did the last year.
What is the average balance of an HSA account? ›
What Is the Average HSA Balance By Age? The average HSA balance for a family is about $7,500 and for individuals it is about $4,300. This average jumps up to $12,000 for families who invest in HSAs. Here's a breakdown of the average HSA balance by age.
What percentage of people invest their HSA? ›
While HSAs are touted by providers and financial experts for their use as investment accounts, only 13 percent of owners used them in that capacity in 2022, EBRI found. Even so, that's a dramatic increase from several years ago, as 12 percent of accounts were invested in 2021 and just 2 percent in 2011.
What happens to my HSA if I no longer have a HDHP? ›
To set up an HSA, the individual must be covered by a federally qualified HDHP. HSAs are owned by the individual, balances roll over from year to year, and the funds are portable, meaning the employee keeps them if they leave the HDHP plan or state service.
What happens to money in HSA if not used? ›
If you don't spend the money in your account, it will carryover year after year. Your HSA can be used now, next year or even when you're retired. Saving in your HSA can help you plan for health expenses you anticipate in the coming years, such as laser eye surgery, braces for your child, or paying Medicare premiums.
What is a good amount to have in your HSA? ›
The short answer: As much as you're able to (within IRS contribution limits), if that's financially viable. If you're covered by an HSA-eligible health plan (or high-deductible health plan), the IRS allows you to put as much as $4,150 per year (in 2024) into your health savings account (HSA).
What is a good HSA balance in retirement? ›
According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2023 may need approximately $315,000 saved (after tax) to cover health care expenses in retirement. An average individual may need $157,500 saved (after tax) to cover health care expenses in retirement.
What is 1 potential downside of investing in an HSA? ›
The main downside of an HSA is that you must have a high-deductible health insurance plan to get one.
How aggressively should I invest my HSA? ›
Try to invest as much of your HSA money as possible while ensuring that you keep enough cash to cover your qualified medical expenses. Consider where your other retirement plans are invested as well to make sure that your HSA investments provide diversification. Avoid taking out funds from your HSA as much as possible.
Is HSA tax-free after 65? ›
If you have money in your HSA when you turn 65, you can spend it on anything you want — but if you aren't spending it for a qualified medical expense, it will be taxed as income at your then current tax rate. You must stop contributing to your HSA when you enroll in any part of Medicare.
Under the last-month rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers) and you meet certain other requirements.
Can I use HSA for dental? ›
HSAs can help pay for a variety of dental services and orthodontic procedures. Here are some of the specific dental procedures your HSA can help cover: Crowns (when non-cosmetic, and may need a letter of medical necessity (LMN)) Sealants (if used for the prevention or treatment of a dental disease)
Can I close my HSA and take the money? ›
You can take money out any time tax-free and without penalty as long as it is used to pay for qualified medical expenses. If you take money out for other purposes, however, you will pay income taxes on the withdrawal plus a 20% tax penalty.
What is the HSA reimbursem*nt loophole? ›
The ultimate loophole available to almost everyone under the age of 65 in our tax code is the Health Savings Account (HSA). It is the only account you can contribute to and deduct the contribution and then withdraw the money tax free. Think about that, a tax deduction going in and no taxes going out.
Can you ever cash out HSA? ›
Your HSA can also function as a backup emergency fund, letting you withdraw tax-free cash when you really need it. You can only do this if you delay reimbursing yourself for previous medical expenses you paid out of pocket for.
When should I stop putting money in my HSA? ›
If you are retiring at the age of 65 ½ or older, to avoid potential tax issues, you want to STOP YOUR HSA CONTRIBUTIONS so that you have 6 months of NO contributions before you FILE FOR MEDICARE.
What is the minimum balance in HSA account? ›
Interest-bearing account After you accumulate the minimum required by your plan (usually $1,000 or $2,000) in your cash account, excess funds can be transferred into an interest-bearing, FDIC-insured account in $100 increments.
Can you have too much money in your HSA account? ›
What happens if I contribute more than the IRS annual maximum? If your HSA contains excess or ineligible contributions you will generally owe the IRS a 6% excess-contribution penalty tax for each year that the excess contribution remains in your HSA.
How much of HSA to keep in cash? ›
We generally suggest keeping two to three years' worth of routine medical expenses in cash, cash investments, or similar low-volatility investments within your HSA.
Should you spend your HSA or save it? ›
HSAs can be a powerful way to build wealth and save for medical costs in old age, according to financial advisors. To the extent possible, savers should invest their HSA funds and pay out of pocket for current health costs. They can keep receipts and reimburse themselves later.
