The Retirement Benefits of a Health Savings Account

What can you tell me about health savings accounts? I have been reading that they are a great investment that can help with growing health care costs when I retire.

A health savings account is a fantastic financial tool that can help you build up a tax-free stash of money for medical expenses now and after you retire — but there is a catch. To qualify, you must have a high-deductible health insurance policy.

How They Work

Health savings accounts (or HSAs) have become increasingly popular over the past few years as health care costs continue to skyrocket and more and more Americans obtain high-deductible health plans.

The benefit of a HSA is the triple tax advantage that it offers: Your HSA contributions can be deducted pretax from your paycheck, lowering your taxable income, the money in the account grows tax-free and if you use the money for eligible medical expenses, withdrawals are tax-free. If you change jobs, your HSA moves with you.

To qualify, your health insurance policy deductible must be at least $1,350 for an individual or $2,700 for a family. In 2018, you can contribute up to $3,450 if you have single health insurance coverage, or up to $6,900 for family coverage. In 2019 you can contribute slightly more — up to $3,500 for single coverage or up to $7,000 for family coverage. In addition, individuals age 55 and older can contribute an extra $1,000 to their HSAs each year. But, be aware that you cannot make contributions after you sign up for Medicare.

The money in your HSA account can be used for out-of-pocket medical expenses, including deductibles, co-payments, Medicare premiums, prescription drugs, vision and dental care either now or when you retire (see, page 5, for a complete list of covered expenses). You can use your HSA for yourself, your spouse and your tax dependents.

Unlike a flexible spending account, an HSA does not require you to use money in the account by the end of the year. Rather, HSA funds roll over year to year and continue to grow tax-free in your HSA account for later use. In fact, you will get a bigger tax benefit if you use other cash for current medical expenses and grow the HSA over time. Be sure to hold on to your receipts for medical expenses after you open your HSA, even if you pay those bills with cash, so you can claim the expenses later. After you open an account, there is no time limit for withdrawing the money for eligible medical expenses.

Be aware that if you use your HSA funds for non-medical expenses, you will be required to pay taxes on the withdrawal, plus a 20% penalty. The penalty is waived for those 65 and older. However, individuals age 65 and older who use HSA funds for non-medical expenses will still pay ordinary income tax on those withdrawals.

How to Open an HSA

You should first check with your employer to see if they offer an HSA and if they will contribute to it. If not, you can open an HSA through many banks, brokerage firms and other financial institutions as long as you have a qualified high-deductible health insurance policy.

If you plan to keep the money growing for the future, look for an HSA administrator that offers a portfolio of mutual funds for long-term investing and has low fees. HealthEquity, OptumBank and the HSA Authority and Bank of America are the top ranked HSA providers for long-term investing according to the investment research firm Morningstar. To search for providers, visit

After setting up your HSA plan, adding money is pretty straightforward. Most plans let you make online transfers from your bank, send checks directly or set up a payroll deduction if offered by your employer. To access your HSA funds, many plans provide a debit card, some offer a checkbook and most allow for reimbursement.

Savvy Living is written by Jim Miller, a regular contributor to the NBC Today Show and author of "The Savvy Living” book. Any links in this article are offered as a service and there is no endorsement of any product. These articles are offered as a helpful and informative service to our friends and may not always reflect this organization’s official position on some topics. Jim invites you to send your senior questions to: Savvy Living, P.O. Box 5443, Norman, OK 73070.

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