The Retirement Account You Never Knew You Needed and Didn't Realize You Already Have

Of all the expenses we have in retirement, there’s one that’s less predictable than the others: your medical expenses. It's easier to determine what your housing costs, transportation, and other regular needs will be in retirement.

When it comes to your health, it’s much less certain. Will you be healthy for a long time? Will you need ongoing treatment for an illness? Will you need expensive surgery? How much will Medicare and supplemental insurance cost? For a typical retirement, a couple could need hundreds of thousands for insurance and other medical expenses in retirement.

Knowing that, you need to consider how to cover this expense.

Your health savings account (HSA) is a lesser-known, yet very efficient way to save for current and future medical expenses. In fact, you may have an HSA already and you may be taking it for granted. Most people view HSA accounts only for reimbursing current medical expenses.

Your HSA has far more power than that, when it comes to its capabilities and how it can help you save money.

First, a little background. To take advantage of an HSA, you must be enrolled in a high deductible health plan (HDHP). Most high deductible plans include HSAs, but make sure to double-check your plan options. Premiums are lower for high deductible plans, but workers are responsible for paying their medical bills until they reach the maximum out-of-pocket or deductible specified by their plan. Those who tend to be healthier, with fewer current medical expenses are the ones who can gain the greatest advantage from a high deductible health plan paired with an HSA. Many employers will help fund the HSA account due to the reduced cost of the HDHP.

Three reasons to save through an HSA

1. Tax advantage for your contributions

The top reason to put money into an HSA is the tax advantage it provides. You avoid paying taxes on the amount that is contributed into your HSA account. Not only do you save on Federal and State taxes, with HSA contributions, you also avoid the 7.65% FICA tax that you would normally pay on that income.

2. The money grows tax-free

As long as the money stays invested, the earnings on the HSA account are not taxed.

3. You’ll have tax-free withdrawals

As long as the money is used for a medical expense, withdraws will be free of federal tax. Eligible medical expenses can be doctor and hospital visits, medical equipment, certain insurance payments, prescriptions and more.

You might be thinking, what if I accumulate money in my HSA and don’t have eligible medical expenses to spend it on? Not likely, but normal tax rates apply if you withdraw money from your HSA for non-eligible expenses, similar to your IRA or 401(k) it may be subject to a penalty.

One more useful thing to know. Similar to other savings accounts, you have the option to invest that money (check your plan for the choices available). Most Health Savings Accounts offer cash, mutual funds, and other investment options for helping your money grow over time.

Most people are unaware of the advantages available if you are able to put away a significant sum into an HSA. We encourage you to review your employer’s plan and consider using this option.

To learn more, watch the OneDigital Financial Academy session on Maximizing Your HSA or download our Guide to the Tax Benefits of Health Savings Accounts.

Helpful resources for employers:

When people understand how health savings accounts work, they’re better able to make the choice between the high deductible and traditional health plan. Download these resources to learn more.

• • Four reasons Your Employees Don’t Choose Your HDHP
  • Five Ways You Save Money When Your HDHP Enrollment Increases

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Investment advice is offered through OneDigital Investment Advisors LLC, an SEC-registered investment adviser and wholly owned subsidiary of OneDigital.