How to Use HSA in Retirement to Make the Most of It

Health savings accounts (HSAs), as you are aware, help you to meet qualified medical expenses. However, not many will know that it could prove a powerful tool in retirement if used correctly. In this article, I will discuss how to use an HSA in retirement to maximize its potential.

How To Use HSA In Retirement

In my last HSA article, I talked about the benefits of HSAs (Health savings accounts) for retirees. Now, we will talk about how to use an HSA in retirement to maximize its potential:

Pay Healthcare Bills

This is the most common use of your HSA, as it is primarily meant for that purpose only. Medical expenses usually form a significant part of overall retirement costs. So, if you have an HSA, it could help you to pay all your health-related bills, including Medicare Part A and B premiums, prescriptions and out-of-pocket costs, like deductibles.

Make It Work As Medicare

You are not eligible for Medicare unless you are 65. So, if you retire before that age, you can use your HSA to cover your healthcare bills, including paying insurance premiums. We generally can’t use an HSA to pay for private health insurance premiums. There are, however, two exceptions to that – paying for health care coverage if it is through an employer-sponsored plan under COBRA and paying premiums while receiving unemployment compensation.

Pay Medicare Premiums

You can use your HSA to pay premiums for Part B and Part D prescription-drug coverage. So, if you are over 65 and have employer-sponsored health coverage, then you can use the HSA to pay for such costs as well.

Pay For Non-Medical Expenses

Once you reach 65, you can use the HSA funds for non-healthcare expenses without having the 20% early withdrawal penalty. This means you can use the HSA funds to meet your day-to-day expenses, including paying for home renovations, buying a boat and more. You will, however, have to pay income taxes (state and federal) on whatever you withdraw.

Cover Long-Term Care Expenses

Long-term care could be expensive. For example, a private room in a nursing home could cost about $90,000 annually, according to the U.S. Department of Health & Human Services. Since Medicare generally doesn’t cover such expenses, you can count on HSA to take care of these.

Keep The Money Invested

One major advantage of HSA accounts is that you can invest the extra funds once you have enough liquid cash to cover your deductibles. You are free to invest your HSA funds in anything, including stocks, bonds or mutual funds.

Even when you retire, you can keep the funds invested until you need it, as there are no required minimum distributions for an HSA. This way, your funds will keep growing even when you retire.

Use Receipts To Reimburse Yourself

With an HSA account, there is no requirement that you need to withdraw from it in the same year in which you incur a particular medical expense. A major advantage of this is that you can reimburse yourself for those expenses in later years.

To do so, however, you will have to save the receipts for all healthcare expenses for which you paid out of pocket. In later years, when you have a significant balance in your HSA account, you can reimburse yourself for those earlier expenses. It must be noted that you can’t reimburse yourself for the expenses incurred before establishing the HSA account.

Leaving An Inheritance

If you have a significant balance in your HSA account and don’t expect to spend it, then you can pass it on to your heirs. The rules surrounding it are complicated, and thus, it would be better to consult with your estate planning attorney.

In general, there are three ways your HSA assets are treated after your death:

  • If your spouse is the designated beneficiary of your HSA, your HSA will become your spouse’s HSA after your death.
  • If your spouse is not the designated beneficiary, then your HSA account ceases. In such a case, the fair market value of your HSA account becomes taxable to the beneficiary in the year you die.
  • In case your estate is the beneficiary, then the fair market value of your HSA account is included in your final income tax return.

Of the above three options, most prefer naming a spouse as the designated beneficiary. If you don’t have a surviving spouse, then your focus should be on tax efficiency when naming a beneficiary (estate or any other beneficiary). So, it would be best if you name a beneficiary that falls in the lowest tax bracket. It is recommended that you consult a professional to come up with the best option.

Final Words

These ways can help you make maximum use of your HSA funds after you retire.

HSAs have been largely overlooked as an investment tool, but considering the triple tax advantage it offers, it could prove an excellent way to save, invest, and take distributions. By maximizing your HSA contributions and investing them wisely, you can easily turn your HSA into another retirement option.

So, the next time you are selecting a health insurance plan, consider a high-deductible health plan (you can qualify for an HSA only if you have a high-deductible health plan). If you are okay with such a plan, you can open an HSA and start contributing as soon as you’re eligible to, and then be able to benefit from it when you retire.

This article originally appeared on ValueWalk

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