Eleven years ago, health savings accounts were introduced as a convenient way for American workers to save for health care expenses. Yet, only about 20 percent of people who are eligible to utilize a health savings account are actually doing so. In many cases, people just don’t know how these accounts work, or how the accounts can benefit them.
According to the Employee Benefits Research Institute, older workers should pay particular attention to health savings accounts. If you’re looking for another way to prepare for retirement, your health savings account (HSA) could help you save an extra $1,000 per year.
A triple tax advantage. A health savings account carries not one, not two, but three different tax savings opportunities! First, the money goes into the account free of taxes, via direct contributions from your pre-tax paycheck. Second, your money accumulates interest in the account, free of taxes. And third, the money can be withdrawn free of taxes in order to pay for qualified health care expenses.
Since HSA contributions are deductible from your gross income, you can lower your overall taxable income for the year.
Prepare for the future. It can be impossible to gauge your health care expenses in retirement, but we are all at risk of increased health problems as we age. The money in your HSA can be withdrawn in retirement to cover Medicare premiums, dental or vision care, copays on medications, or nursing home care.
You can even withdraw the money for other purposes. After age 65, any money left over in your account can be withdrawn at ordinary income tax rates.
Keep in mind that once you sign up for Social Security or Medicare, you’re no longer eligible to open or fund a health savings account. The time to open a HSA is now, during your career, while you are saving for retirement. Consult with your financial services professional or your human resources department at work to see if you’re eligible to open a health savings account.