Although the health savings account (HSA) passed its 15-year mark in 2019, the account structure lacks popularity as a tool to save for retirement, despite its incredible tax benefits. Not only do HSA contributions reduce taxable income, but their earnings do not incur taxes. On top of that, all qualified distributions from the account remain untaxed.
An article by Paul Fronstin in Notes highlights how you can use your HSA to save a substantial amount of money for your retirement. The most striking aspect of the article explains how under the right circumstances, account owners could create a million dollar HSA by the age of 65.
Believe it or not, this goal is not completely unrealistic. If an account owner contributes to an individual HSA at the age of 25, makes the maximum contribution each year (projecting an increase in contribution limits over time), and makes wise investments, his or her HSA could be worth $1.1 million by retirement. Additionally, this could save the account holder up to $420,000 in federal income taxes.
In order to be a skilled HSA investor, it's important for retirement investors to understand both the advantages of an HSA, and its limitations. Account holders only qualify for contributions to their HSA if they are currently enrolled in a high deductible health plan, and they do not benefit from an additional non-HSA eligable health plan. Those enrolled in Medicare can no longer contribute to an HSA. If an account holder takes a non-qualified distribution (one which is not used to pay for qualified medical expenses), the distribution is not only taxed but is also subject to a 20% penalty.
Retirement investors can always withdraw from an HSA even if they don’t qualify to contribute to one - meaning if their health care plan changes, they do not need to close their HSA account. Unlike many other retirement account strutures, HSA holders can continue to contribute to their HSA at any age, and are never required to take required minimum distributions. There are no income restrictions preventing a retirement investor from opening an HSA, and he or she can contribute whether or not they are drawing salary. The abundance of benefits offered by HSAs make the account structure a unique retirement savings tool.
Though the HSA varies greatly from other retirement accounts in terms of age restrictions and distributions, it follows the same rules as more common retirement accounts when it comes to investing. The 1.1 million dollar HSA calculation presented in Fronstein's article was based on high-yield investments (about 7.5%). As savvy investors know, this is an unusually high return to find in traditional investments such as stocks and mutual funds; especially when taken over 30+ years.
This is where self-directed assets can give retirement investors the edge. New Direction Trust Company has many clients who invest both their retirement accounts AND their HSAs in real estate, promissory notes, gold, and other non-traditional assets. Retirement account holders who don't have enough cash to buy their dieal investment property can even partner their account with the funds in their HSA! Make your retirement money go further and use your HSA to its best advantage.