Most people know that health savings accounts (HSAs) are a source of tax-free money to pay out-of-pocket medical expenses. But if you plan carefully, HSAs can also be a valuable source of retirement savings, providing a triple tax benefit that’s even better than a 401(k).
HSA contributions are tax deductible — even pretax if made through an employer plan — when you make them. The earnings from your HSA are tax deferred through the years. And when you withdraw the money for qualified medical expenses, you can do it tax free.
Medical care is a big part of retirement spending. Fidelity Investments estimates that a 65-year-old couple retiring in 2022 will need about $315,000 to cover health care expenses in retirement — including Medicare premiums, copayments, deductibles and prescription drug costs.
If you start planning, the HSA can be a great source of tax-free money for those expenses and more. So don’t pass up the triple tax benefits of an HSA.
Save more in an HSA for out-of-pocket costs
You can’t make new contributions to a health savings account after you enroll in Medicare. But you can contribute to the account before then if you have an HSA-eligible health insurance policy, whether through your employer or on your own.
In 2023, the policy must have a deductible of at least $1,500 for self-only coverage or $3,000 for family coverage. You can contribute up to $3,850 in 2023 if you have self-only insurance coverage or $7,750 for family coverage, plus an extra $1,000 if you’re 55 or older. Plus, many employers contribute to employees’ accounts — an average of $870 for Fidelity’s employer plans.
You have until the tax-filing deadline to contribute to an HSA for the previous calendar year. That means you have until April 18, 2023, to make tax-deductible HSA contributions for 2022. To qualify, your health insurance policy must have had a deductible of at least $1,400 if you had single coverage or $2,800 for family coverage in 2022. You can contribute up to $3,650 if you had coverage for yourself or $7,300 for family coverage, plus an extra $1,000 if you were 55 or older.
If you had an eligible high-deductible health insurance policy only for the first few months of the year, your contribution limit will be prorated based on the number of months you had the eligible policy.