HSA – the Secret IRA Wealth Builder
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Do you want to know the best ways to build wealth for retirement? There are many ways to generate tax-deferred growth to build wealth for retirement. You can max out any of the following accounts: 401k, Roth or Traditional IRA, or Health Savings Account (HSA).
Many contribute to an employer 401k or other defined benefit plan each paycheck. You may also put excess savings into an IRA or HSA. I contribute to a Roth 401k, max out my HSA every year, and Roth IRA if I have anything left over. My preference is to pay taxes now rather than during retirement. Plus, I can use my Roth IRA as an emergency fund if needed.
Unfortunately, most Americans spend more time planning their vacations than their retirement savings. It wasn’t until I began working at Midland that I understood the importance of retirement funds. I came into Midland already knowing 401ks and IRAs existed, but an HSA was new to me. And boy, did it surprise me! Especially the secret IRA opportunity that exists with HSAs.
What Is a Health Savings Account (HSA)?
An HSA is a handy way to save and pay for medical expenses. To qualify for an HSA account, you must have a high-deductible health plan (HDHP). An HDHP has a minimum annual deductible of $1,500 for an individual or $3,00 for a family for 2023. Medicare does not qualify as an HDHP.
The first benefit of an HSA is the deductible contributions. The second benefit is that the earnings grow tax-free. Thirdly, distributions are tax-free as long as they are for qualified medical expenses. This makes HSAs a triple whammy.
Using an HSA account is very simple. You go to the doctor and get a medical bill for $500. You pay the bill with a credit card, and then request a distribution from your HSA for $500. The $500 is tax and penalty-free because it was for qualified medical expenses!
HSA Contribution Limits
| TYPE | 2022 | 2023 | CHANGE |
|---|---|---|---|
|
HSA Contribution Limit (employer + employee) |
Self-only: $3,650 Family: $7,300 |
Self-only: $3,850 Family: $7,750 |
Self-only: +$200 Family: +$450 |
|
HSA Catch-Up Contributions (age 55+) |
Self-only: $1,000 |
Self-only: $1,000 |
No change |
|
HDHP Minimum Deductibles |
Self-only: $1,400 Family: $2,800 |
Self-only: $1,500 Family: $3,000 |
Self-Only: +$100 Family: +$200 |
|
HDHP Maximum Out-of-Pocket Amounts (Deductibles, Co-Payments, and Other Amounts)(Does Not Include Premiums) |
Self-only: $7,050 Family: $14,100 |
Self-only: $7,500 Family: $15,000 |
Self-only: +$450 Family: +$900 |
What Can I Use an HSA For?
There is an abundance of IRS-qualified medical expenses for which you can use an HSA. Some examples are doctor visits and co-pays, laboratory fees, vaccines, dental cleanings, and many more. Uncommon (but qualifiable) costs include acupuncture, chiropractor services, and medical equipment such as hearing aids or a wheelchair.
Medical Expenses Throughout Retirement
According to Healthview Services, beyond the medical cost savings, there are additional benefits of the HSA that HDHP enrollees are eligible to use. Consider the case of a healthy 40-year-old couple retiring at 67, with a wife that earns $60,000 a year and has access to an HSA-eligible HDHP. By maximizing HSA household contribution limits ($6,750 from them, plus $1,000 from the employer), this couple can:
- Take advantage of the employer contributions described above (more than $25,000 between now and retirement)
- Reduce FICA taxes owed by more than 10% annually
- Cover all pre-retirement out-of-pocket (OOP) health costs for the next 22 years, tax-free
- Invest remaining annual HSA assets after OOP spend
- Add $639,571 to savings through their HSA to age 67 (assumes 7% pre-retirement rate of return) to be used tax-free on health expenses or penalty-free on any other expenses in retirement
Advantages of an HSA
Triple Tax Advantage
-
Tax-deductible. You can deduct the amount you contribute to an HSA to help lower the amount you have to pay in taxes. (Current limits are $3,850 for single people and $7,750 for families)
-
Tax-deferred growth. Unlike a personal account, growth in an HSA is tax-deferred. You will not have to pay capital gains tax year over year.
-
Tax-Free and Penalty-Free Distributions for Medical Expenses. Regardless of age, you can take a distribution for qualified medical expenses tax and penalty-free.
No Income Limit Restrictions On Tax Deductions
Some people cannot get a tax deduction on a Traditional IRA or contribute to a Roth IRA because their income is too high. With an HSA, you can contribute and get a tax deduction regardless of how much you make.
HSAs Offer Unique Freedom to Save
The Unknown Benefit of HSAs
Once you reach 65, you can begin taking funds out of our HSA penalty-free for nonmedical expenses. You’ll still have to include what you withdraw for nonmedical expenses as income for the year. Taking nonmedical funds out of an HSA essentially turns the HSA into a Traditional IRA. If you take funds out before age 65 for nonmedical expenses, you will pay a hefty 20% tax penalty. You will also have to include the distribution as income for the year.
Estate Planning Opportunity (No Required Minimum Distribution)
Traditional IRAs have a required minimum distribution (RMD) for those 73 and older. But, HSAs do not currently require an RMD. A few years of extra compound growth year over year can be a big difference!
How Do I Get Started With an HSA?
You may want to review your situation and financial goals with a CPA or financial planner. If you are eligible for an HSA, you may want to consider taking advantage of this tax-deferred growth opportunity and tax deduction.
Midland specializes in self-directed IRAs and HSAs that hold alternative investments such as real estate, promissory notes, futures/forex accounts, cryptocurrencies, real estate, and private stock. Midland will be able to hold your investment and do the necessary record-keeping and reporting to the IRS that allows you to invest in alternative assets through your self-directed IRA.
If you have any questions about HSAs, please contact us at (239) 333-1032. Visit our website for more information regarding the benefits of HSAs.
Author: Andy Anger, Client Services Team Lead at Midland IRA, Inc.
MIDLAND TRUST COMPANY, NOR ITS AFFILIATES OR SUBSIDIARIES (COLLECTIVELY REFERRED TO AS “MIDLAND”), IS NOT A FIDUCIARY: Midland’s role as the Custodian and/or Administrator of self-directed retirement accounts is non-discretionary and/or administrative. The account holder or his/her authorized representative must direct all investment transactions and choose the investment(s) for the account, and is responsible for conducting his/her own due diligence. Midland has no responsibility or involvement in selecting or evaluating any investment and does not conduct due diligence on any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.