Flexibility in your financial plan in retirement is directly related to the tools you used during your working years to prepare. Employee benefits packages often provide some unique tools you can take advantage of to create an efficient financial plan over your lifetime.
One powerful tool we frequently recommend is the health savings account (HSA). It offers a unique opportunity to save for medical expenses while enjoying valuable tax benefits, making it a cornerstone of savvy financial planning.
An HSA is a tax-advantaged savings account available to individuals enrolled in high-deductible health plans (HDHPs). It allows the account holder to save money for qualified medical expenses on a pre-tax basis, providing a triple tax advantage: tax-deductible contributions, tax-free earnings growth, and tax-free withdrawals for qualified medical expenses.
One of the primary advantages of HSAs is their versatility. Unlike flexible spending accounts (FSAs), HSA funds roll over from year to year, allowing individuals to accumulate savings over time and invest the funds within the account. An HSA vests immediately, meaning the funds are yours even if you part ways with your current employer. These features make it an excellent tool for both short-term and long-term healthcare planning.
At the next level of financial planning, HSAs offer a unique opportunity for retirement savings. If your cash flow allows, instead of using your HSA as an account to take distributions from now, it can become the most tax-advantaged retirement account within your financial plan.
Once individuals reach the age of 65, they can withdraw funds from their HSA for any purpose without penalty (though withdrawals for non-medical expenses are subject to income tax). This flexibility makes HSAs an attractive supplement to traditional retirement accounts such as 401(k)s and IRAs. Let’s face it – healthcare costs are not going down! We will likely always need to cover some sort of medical expense, which makes this account a perfect option for future qualified withdrawals.
To make the most of your HSA, consider the following actions:
1. Maximize contributions: Take advantage of the opportunity to contribute the maximum allowable amount to your HSA every year. For 2024, the annual contribution limits are $3,650 for individuals and $7,300 for families, with an additional catch-up contribution of $1,000 for individuals aged 55 and above.
2. Invest for growth: Once your HSA balance reaches a certain threshold (ideally the cash you might require for short-term needs, your deductible, or emergencies), consider investing a portion of your funds in a diversified portfolio. Thus, you transform this into a triple-tax-exempt retirement account! By doing so, you can harness the power of compound growth to maximize your long-term savings potential.
3. Use your funds wisely: Be strategic about how you use your HSA funds. Cover current medical expenses out of pocket whenever possible, allowing your HSA balance to continue growing tax-free. Save your receipts and reimburse yourself from your HSA in the future, effectively turning your HSA into a tax-free healthcare reimbursement account.
HSAs are a valuable tool for individuals looking to optimize their healthcare planning and maximize their long-term savings potential. By understanding how HSAs work and implementing smart strategies for contributions and withdrawals, you can ensure that you are prepared for whatever healthcare expenses arise while also building a solid foundation for your financial future.
Working with a financial advisor is great as you near retirement – it is a must for proper planning once you are no longer receiving a formal paycheck. However, there is a limit on tax efficiency and tools you can use with your nest egg once you are retired. Your working years are vital and directly impact the flexibility you have in retirement. The tools available to you during those years are unique, and it is prudent to start a professional relationship with a financial advisor to create an efficient financial plan.
As you enter open enrollment season, contact us so we can review and optimize your employee benefits. Kindly extend our offer to your adult children as well. It is our joy and privilege to accompany our clients and their families on their financial journeys!
-Kristiana Daniels, CFP®, EA, BFA™
Wealth Advisor
