Saving for retirement can be a huge financial challenge, especially as health care costs can only add up to $ 325,000 for some seniors. The good news is, a number of tax-deductible accounts help make saving easier.
Unfortunately, not everyone benefits from it. In fact, millions of Americans could miss out on a particularly valuable account that yields some extremely generous taxes.
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A savings account with unparalleled tax benefits
So what is the account that most Americans review? It’s a health savings account, like HSA. According to a recent Schwab survey of employees with 401 (k) s, only 77% of them are offered a health savings account by their employer, but only 45% use it.
Health savings accounts are not available to everyone. You must have a qualifying plan with high deductible health insurance to be eligible. But if your employer offers one if you are eligible to open one on your own, you should definitely contribute to it.
This is because HSAs not only save you from covering health care costs that you will incur in the near future; you can put money in your account (up to annual limit for contribution), invest it and let it grow. The contributions you make are in pre-tax dollars, just like those to a 401 (k) or an IRA. But here’s the big difference from these other retirement accounts: Any money you withdraw from an HSA can also be taken tax-free, as long as it is used for qualifying medical expenses.
That’s right: While you have to choose between a front tax return with traditional 401 (k) or IRA accounts or tax-free withdrawals with Roth 401 (k) or Roth IRAs, you get the tax savings on both ends when you invest in an HSA – as long as you withdraw the money for medical expenses. That makes them the most valuable retirement savings account, because no one offers the opportunity to double double savings like this.
The catch is that you have to use the money for health care expenses to get this double tax return. For many seniors, this is not a problem, given that medical expenses at retirement can be astronomical. But if you are healthy as a retiree, you do not have to worry about the money invested. If you withdraw money from an HSA for anything other than health expenses before the age of 65, you are subject to a 20% tax penalty on the withdrawal. But if you take out money no 65, it is charged as ordinary income without penalty if you do not use it to pay for medical services.
So the least that happens is that you get the preemptive taxes that a traditional 401 (k) as IRA would provide and are taxed on distributions from your HSA as ordinary income as you do not need many medical services. But if you are like most older Americans and a good portion of your money goes to medical care, investing in an HSA will cost the cost of that care much cheaper.
Do you need to invest in a health savings account before retirement?
If you have access to a health savings account, there is little reason not to use it. You can take out the money to cover medical care as a pension and get the double tax breaks that this account provides, or you can exercise the option to withdraw the money for any other reason after the age of 65 and be taxed on it income just as you would with a traditional 401 (k).
So if you are eligible to invest in an HSA and do not take the opportunity, sign up and start contributing. You will be glad you did.
