The funds you save in a health savings account (HSA) can be useful in retirement to help pay for qualified medical expenses, save on taxes, and more.
Quick takeaways
- An HSA can be used while you’re working, but if you don’t need the funds, there are several benefits when you reach retirement.
- HSA savings offer retirees tax benefits as well as a way to pay for qualified medical expenses.
- Any remaining HSA funds also go to your beneficiary after you die, meaning you can include them in estate planning.
One retirement savings puzzle piece that often gets overlooked? A health savings account (HSA). which lets you put away pre-tax money for qualified health expenses, if you’re working and have a high-deductible health plan. Many people assume that an HSA can only be used when you’re working, but it’s an account that has plenty of ways to help you in your retirement planning.
If you don’t need the funds to pay for expenses while you’re working, you can think differently about your HSA. “The real power in an HSA is its compounding and growth,” says Sri Reddy, senior vice president of Retirement and Income Solutions at Principal®.
Here are four options to consider.
1. Pay for qualified health expenses in retirement.
When you retire you can use any remaining HSA savings for qualified health care expenses, including:
- IRS-qualified health care premiums for Medicare Parts B, C, and D
- Medicare deductibles, co-pays, and co-insurance
- qualified long-term care insurance premiums
- dental and vision expenses
- hearing aids
- insulin and diabetic supplies
- over-the-counter medicine and medical equipment and supplies
Tip: You may have a debit card that’s tied to your HSA to pay for expenses. However, you’ll pay fees when you use the card, and you still submit receipts for qualified expenses. “Instead, think about paying for the health care expenses with something like a rewards credit card,” says Reddy, “then reimburse yourself after you submit receipts.”
2. Use an HSA’s tax advantages in retirement.
An HSA comes with a couple of retirement tax advantages. “If you don’t end up using it before retirement, an HSA is taxed like a 401(k),” Reddy says.
- Distributions are tax- and penalty-free if they’re for qualified medical expenses. (Keep your receipts.)
- Distributions aren’t included in modified adjusted gross income when you fill out your tax return. They won’t affect retirement-related taxes such as the Medicare premium surtax or Social Security benefits.
3. Cover other expenses in retirement.
You can use HSA distributions to pay for nonmedical expenses starting at age 65. Those payouts are taxed at the same rate as distributions from a traditional IRA. So if you don’t need the savings for medical costs, you can use the funds to cover unexpected budget items. And unlike Social Security or required minimum distributions (RMDs), there’s no age restrictions on use of HSA funds.
4. Include your HSA in your estate plan.
When you set up an HSA, you can name a beneficiary who receives any unused funds after you die. If the beneficiary is your spouse, they’ll receive the tax benefits, too.
What’s next?
Not sure how to include your existing HSA savings in your retirement planning? The Principal Retirement Wellness Planner lets you add your HSA account and uses it to calculate a wellness score for a big-picture view of your total retirement savings. Get started by logging in to your Principal account.
