Health Savings Account: Funding an HSA Could Help You Prep for Retirement

By one estimate, the average 65-year-old couple retiring in 2017 could spend more than $404,000 on health-care expenses in retirement. This figure includes lifetime premiums for Medicare, supplemental insurance, dental coverage, deductibles, coinsurance, and other out-of-pocket costs.1

The primary purpose of a health savings account (HSA) is for workers to set aside pre-tax income to pay current and future medical expenses not covered by health insurance. This is why HSAs are sometimes called Medical IRAs. They incentivize saving with three powerful tax advantages: (1) the dollars you contribute are deducted from your adjusted gross income, (2) investment earnings compound tax-free inside the HSA, and (3) withdrawals are untaxed if the money is spent on qualified health-care expenses. (Depending on the state, HSA contributions and earnings may or may not be subject to state taxes.)

Another benefit is that account funds not needed for health expenses are available for any other purpose after you reach age 65. When HSA money is spent on anything other than qualified medical expenses, withdrawals are taxed as ordinary income but don’t incur the 20% penalty that applies to taxpayers under age 65.

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Eligibility and Contribution Limits

To be eligible to establish or contribute to an HSA in 2019, you must be enrolled in a qualifying high-deductible health plan (an HDHP with a deductible of at least $1,350 for individuals, $2,700 for families). Qualifying HDHPs also have out-of-pocket maximums, above which the insurer pays all costs. In 2019, the upper limit is $6,750 for individual coverage or $13,500 for family coverage, but plans may have lower caps.