Everyone knows about the 401 (k) s and IRA, but there is another vehicle for retirement savings that has received a lot of attention lately: HSAs. Most people think of HSAs as a tax-based way of saving for future medical expenses, but they have much more to offer.
Here's how they work and how to use an HSA to supplement your pension savings.
Can I contribute to an HSA?
To be eligible for an HSA, your health insurance must be a high-quality health plan (HDHP). This is defined as a plan with a deductible of $ 1,350 or more for individuals or $ 2,700 or more for a family. Once you have signed up for the plan, you can open an HSA account with your bank and start contributing funds. If your employer offers the health insurance plan, the company can set up an HSA for you as an employee's benefit.
Single adults can contribute up to $ 3,500 to an HSA in 201
Any postpay money you contribute can be deducted from your taxable income for the year. If your employer 's health insurance plan comes with an HSA option, you may be able to help pay before tax directly to the HSA, and your employer may match some of your contributions. However, the total contributions you and your employer make to your account cannot exceed the annual contribution limits.
Some HSAs keep your money in cash, while others allow you to invest in securities or other investment products, just like you would with a 401 (k) or IRA, to help your savings grow faster. If you choose to invest HSA, consider allocating your funds in the same way as your 401 (k) and IRA funds to ensure your investments match risk tolerance and investment goals. You may need to save a certain amount before your bank allows you to invest the sum.
Unlike flexible spending accounts (FSAs), money in your HSA rolls over from year to year so you keep it until you have to spend it. You can also take the HSA with you if you leave your current job, even if you can't make new contributions unless you keep your high-quality health plan.
What can HSA distributions be used for?  You are allowed to take distributions from HSA of all ages as long as you use it for qualified medical expenses – pay for hospital bills, prescription medications, specialist visits and other medical costs.
And the best part is, you won't pay any taxes on these outlets. For this reason, it is a great place to stop emergency receipts to help you cover costs for those who cost you if you are severely injured or ill. You can also save money for scheduled medical expenses, such as pregnancy and childbirth, non-acute surgery, long-term care, and mental health or substance abuse treatment.
But HSA has another benefit for the elderly who realize. When you are 65, you can also use the HSA funds for non-medical expenses, even if you want to pay income tax on those outlets. You can also make non-medical withdrawals if you are under 65, but you pay a 20% penalty, making this a rarely desirable option.
Another benefit for HSAs: When you become 65, HSA becomes like a traditional IRA or 401 (k), but unlike those retirement accounts, HSAs have no required minimum benefits (RMDs). The government requires you to begin taking these distributions from all retirement accounts, with the exception of the Roth IRA, by age 70 1/2 to ensure that it receives its tax cuts on your earnings. The amount you need to deduct will depend on the age and value of your retirement accounts. The problem with RMD is that they can force you to charge more than you want, pushing your taxable income into a higher income tax bracket. But not taking the RMD is not an option if you do not want to pay a 50% penalty on the amount you should have taken out.
You don't have to worry about any of this if you keep your money in an HSA. Your money may be deferred tax as long as you want it, and qualified medical expenses distributions will still be tax-free even after you can no longer contribute to the account.
How can HSAs be used strategically?
It is a good idea to contribute at least as much as your health insurance deductible to your HSA, even if you do not intend to use it for retirement savings. In this way, if an unexpected medical expense occurs, you can cover it without withdrawing your credit card to meet your deductible before the insurance goes into. However, for small medical expenses, you may prefer to pay for pocket so the HSA savings continue to grow for greater down the road costs.
An HSA may be a good supplement to your other retirement accounts, but you need to carefully consider the terms. If your account allows you to invest your money in mutual funds, it also charges costs. These are annual fees that all shareholders pay, and they can hamper the growth of your money. Look at the prospectus for the funds you are invested in to see how much you pay in fees. If there are more than 1% of your assets each year, HSA may not be the most efficient retirement vehicle for you. Consider moving your money to more affordable investments, such as index funds, or not investing your HSA funds at all, and contributing most of your retirement savings to a 401 (k) or IRA instead.
You can set up automatic deposits to your HSA from the paycheck if the employer allows this, or budget a certain dollar amount each month you want to contribute. Keep an eye on the contribution limits every year and not exceed them, otherwise you pay income tax and a 6% surplus tax rate.
With all the tax benefits, there is no reason not to open an HSA if you qualify for one. But like all your retirement accounts, consider HSA thoroughly so you understand what you get and what your account can cost you.