As of the end of 2017, there were more than 1 million people in the United States who have opened a HSA. With that many accounts, it is time to look at whether or not you should open one too.

The “retirement health savings account rules” is a term that refers to the new tax law. The HSA allows you to save money for retirement with pre-tax dollars.

Health Savings Account (HSA) Is The Ultimate Retirement Account

What could be better than a 401(k)? Is it better to have an IRA or an ROTH IRA? The Health Savings Account is a little-known secret.

Even though it isn’t exactly a retirement account, the Health Savings Account (HSA) is the ultimate retirement account. Here’s why the HSA is the greatest choice for your retirement savings because of its triple-tax benefit.

What Is A Health Savings Account (HSA)?

Former President George W. Bush established the HSA in 2003 as part of the Medicare Prescription Drug, Improvement, and Modernization Act to allow consumers to put away pre-tax income to meet health-care expenditures.

It is provided to consumers with high-deductible health insurance policies (HDHPs).

Because HDHPs have greater out-of-pocket expenditures (because to higher deductibles), the government wants to assist Individuals by enabling them to save money before taxes for medical bills.

Pile of blister pack medicationsPile of blister pack medications P

How Is a Health Savings Account Usually Used?

Assume you have a $3,000 deductible on an HDHP plan.

If you see a doctor for a $4,000 procedure, for example, you’ll be liable for the first $3,000 (your deductible amount) before your HDHP plan covers the remaining $1,000.

It’s a lot of money, $3,000 after taxes!

If your tax rate is 30%, you’ll need to earn $4,286 in pre-tax earnings to balance out at $3,000 after taxes.

That’s when the HSA comes in handy.

Because of the tax savings, you’d need to earn precisely $3,000 to put money into your HSA to cover this medical expense:

Health-Department Health-Department Health-Department Owed Medical Expenses 30% Tax on Earnings Income is required.
Without a contribution to the HSA $3,000 $1,286 $4,286
Contribution to the HSA $3,000 ‘Zero’ (pretax) $3,000

Three people looking at x-ray resultsThree people looking at x-ray results

This is excellent in and of itself, but what if you don’t have a lot of medical bills?

Is it still worthwhile to contribute to an HSA?

Yes, absolutely, thanks to the triple-tax benefit I outlined before. A health savings account (HSA) is the finest retirement account choice available to you!

What Does It Mean When You Say An HSA Has A Triple-Tax Advantage?

A Health Savings Account offers three tax benefits that no other account offers:

HSA triple tax advantageHSA triple tax advantage (Infographic on HSA Benefits)

The first benefit is that HSA contributions are tax deductible (Pre-Tax)

Any money you put to an HSA is not taxed at all, as mentioned in the previous example.

You save money right away by eliminating any taxes that would normally be deducted at your income tax level.

However, you may only deposit a particular amount of money into your HSA each year, and the amount fluctuates each year due to government revisions.

The donation restrictions for 2020 and 2021 are as follows:

Limits on HSA Contributions 2021 2021
Individuals $3,600 $3,650
Families $7,200 $7,300

Second benefit: HSA earnings grow tax-free.

Your HSA works similarly to a savings account that earns interest.

The interest rates aren’t spectacular, but after you’ve put $1,000 in (the amount varies by plan; contact your plan sponsor for more information), you may invest the remainder in stocks, bonds, and other funds to boost your growth.

Best of all, there are no capital gains to record no matter how much stock and bond you purchase and sell. There are no taxes to be paid.

Until you take money out of your account, whatever you earn is subject to taxes.

Everything is tax-free, darling!

And, unless you have a medical cost to pay, you may just let your money grow via your investments.

Advantage #3 — HSA funds may be withdrawn tax-free for medical expenses.

When you retire and elect to take money from an HSA, you’ll have to pay taxes on the amount removed, just as with other retirement accounts like a 401k or IRA.

Unlike other retirement plans, however, an HSA may also be used for medical costs after retirement.

Money spent on medical bills is never taxed:

IRA versus. HSA, 401k, ROTHIRA versus. HSA, 401k, ROTH (Infographic on HSA Taxes)

IRA versus. HSA

HSAs are comparable to IRAs, however they have a few advantages:

  • Each year, pre-tax funds are put into an HSA, which may be withdrawn at any time without penalty or tax to pay for eligible medical expenditures. Non-medical withdrawals are permitted, but they will be taxed as ordinary income and will be subject to a 10% penalty if made before the age of 65.
  • Any HSA funds that are not spent each year (unlike the Flexible Spending Account), collect interest tax-free and may be used to augment medical costs at any point in the future.
  • The account, like an IRA, is yours, not your employer’s. In contrast to an IRA, though, your employer may contribute to your HSA.

Consider the HSA to be a high-powered retirement account.

It not only gives the advantages of both a standard IRA and a Roth IRA retirement account, but it also delivers a benefit that neither IRA does: the ability to use it tax-free for medical expenses during retirement.

As Part Of Your Retirement Plan, Consider Using A HSA

Traditional Retirement Planning Suggestions

You’ll ultimately come across tips on how to prioritize your retirement approach if you spend enough time reading about personal finance.

This is what it goes like:

  1. Make enough contributions to your 401(k) plan to get the full match from your company.
  2. Put as much money as you can into your IRA or ROTH IRA.
  3. Contribute as much as you can to your 401(k) account.

Saving for Retirement in the 21st Century

Based on all of the advantages of a Health Savings Account, I believe the contemporary advise should be:

  1. Make enough contributions to your 401(k) plan to get the full match from your company.
  2. Put as much money as you can into your HSA each year.
  3. Invest to the highest yearly limit in your IRA or ROTH IRA.
  4. Contribute to your 401(k) plan up to the maximum yearly limit.

The first objective should still be to contribute to earn your company’s matching contribution; it’s essentially free money.

However, before concentrating on an IRA or maxing out your 401k, you should first fund your HSA to the full allowed.

Final Thoughts

Your hidden weapon is a Health Savings Account, which should be one of your top retirement alternatives.

No other account offers all of the benefits that an HSA does:

  • Contributions are tax deductible in full.
  • Money taken out for medical reasons is never taxed.
  • Earnings that aren’t taxed (includes interest and investment earnings)
  • If money is spent for health care expenditures, interest gains are tax-free.

I understand that not everyone can afford a high-deductible health plan (HDHP) with an HSA.

An HSA is one of the greatest non-traditional retirement solutions for people who qualify.

The “hsa triple tax advantage” is the ultimate retirement account. It allows people to contribute up to $3,350 a year for an individual and $6,750 for a family. The money can be used in any way the person wants.

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