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How to Use a Health Savings Account (HSA) for Retirement and Rules to Know

Healthcare costs are often one of your most significant expenses in retirement. Some estimates project that a couple retiring in 2021 at age 65 will need more than $400,000 to cover Medicare premiums, deductibles, and out-of-pocket costs incurred during retirement.

As you are building your retirement savings, it is essential to consider how your future health care costs may affect the amount you will need to save for retirement. HSAs can be a great way to supplement your retirement income and save for medical expenses.

What is an HSA?

An HSA is a savings account that was created to help people save and pay for medical expenses that are not covered under a high deductible health insurance plan. One of the significant benefits of HSAs is that money you put into your HSA may never be taxed:

  • Contributions are always tax-deductible
  • Investment earnings grow tax-deferred
  • Money taken out is not taxed if used to pay for qualified medical expenses

Who can have an HSA?

To put money into an HSA, you must be covered by a High Deductible Health Plan (HDHP), and cannot be covered by another health insurance plan, claimed as another individual’s dependent, or be enrolled in Medicare. Your HDHP does not cover medical expenses (except preventive care and certain other care) until the minimum deductible is met each year. Your HDHP also must limit the amount of out-of-pocket expenses you have to pay each year.

If at some point you are no longer covered by an HDHP, you will no longer be eligible to contribute to the HSA, but you can still maintain an account and withdraw qualified tax-free distributions.  It is your personal HSA and not tied to your employer.

How much can I save in my HSA?

You can change the amount you contribute to your HSA annually and most employees make contributions through payroll deductions. If your HDHP covers only yourself, you can contribute up to $3,850 for 2023. If you are age 55 or older, you can contribute an additional $1,000 catch-up contribution for a total contribution limit of $4,850.

If your HDHP covers you and family members, you can contribute as much as $7,750 for 2023. You and your spouse can split that amount between each of your HSAs if your spouse is eligible to contribute.

You may contribute an additional $1,000 to the account as a catch-up if you are both age 55 or older.

Employers can make tax-deductible contributions to their employees’ HSAs. However, the total employer and employee contributions are subject to these annual limits.

When can I take a distribution?

You may take money out of your HSA at any time. In fact, many people take money throughout the year to pay for medical services or prescriptions for themselves or their family. Some HSA custodians provide an HSA debit card to conveniently pay expenses as they arise. If you use the money to pay for qualified medical expenses, the distribution is tax-free.

You do not have to use up all of your HSA contributions each year. Your HSA savings can continue to grow and be used in later years – even in retirement. After your death, if your spouse is your HSA beneficiary, the HSA will automatically become your spouse’s HSA. If your HSA beneficiary is not your spouse, your beneficiary will be required to withdraw the remaining money, which will be taxable.

What if I do not use the HSA to pay medical expenses?

If you do not use the HSA money to pay for qualified medical expenses, you will have to pay income tax on that money and an additional 20% tax. After age 65, you will not have to pay the 20% tax if your distributions are not used to pay qualified medical expenses, but you will have to claim the distribution as taxable income.

You can use your HSA to save more for retirement by:

  • Contributing as close to the maximum amount as possible each year until you reach age 65
  • Using other money to pay for current medical expenses when you are able
  • Investing your HSA account for growth

Even if you need to use some of your HSA savings periodically, any amount you can accumulate in an HSA will help you supplement your retirement savings.

Why you might fund an HSA instead of an Individual Retirement Account (IRA)

If you cannot afford to save the maximum amount in both your HSA and an IRA, you can still use an HSA strategically as a valuable supplement to retirement savings.

Potentially tax-free savings – With tax-deductible contributions and tax-free distributions for qualified medical expenses, the dollars you contribute to your HSA may never be taxed. With IRA contributions, on the other hand, Roth contributions are taxed when you contribute, and traditional IRA contributions are taxed when you distribute them.

  • No required distributions – Some people choose to max out their HSA contribution first because they will not be required to take money out of their HSA when they reach age 72 the way they will be with traditional IRAs.
  • No income limits – Some people are not eligible to make Roth IRA contributions or to deduct their contributions to a traditional IRA because their income is too high. These income limits do not apply to HSAs.

With our simplified account management, mobile tools, education resources, and hassle-free claims, a Group HSA from Ubiquity and our partner HealthEquity® will help you and your employees save more for your health.

With one click and a couple of minutes with our simple sign-up process, we will help you be on your way to offering your employees the best that healthcare has to offer with a Ubiquity HSA.
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44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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© 2023 Ubiquity Retirement + Savings
Privacy Policy
Do not sell my info
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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