Move Over, 401(k)s: HSAs Are the New Retirement Trend

With its high contribution limits and employer matching option, the 401(k) has long been considered the go-to retirement account. But lately, a new account has been stealing the spotlight: the health savings account (HSA). OK, so it’s not technically a retirement account, but it’s still a great place for your savings. Here’s why.

HSAs give you a tax break today

HSA contributions reduce your taxable income for the year, like contributions to most 401(k)s. Individuals can set aside up to $3,650 in an HSA in 2022. while families can save up to $7,300. Adults 55 and older can tack an extra $1,000 onto these contribution limits.

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But in order to contribute to an HSA, you need a qualifying health insurance plan, meaning one with a deductible of $1,400 or more for an individual or $2,800 or more for a family in 2022.

Those who qualify should definitely consider setting some money aside here. Even if the contribution limits are much lower than 401(k) limits, stashing funds here is still saving you money on your taxes today. And it could go a long way toward helping you cover your retirement costs, especially if you invest your HSA funds.

HSAs give you tax-free medical withdrawals

In addition to the up-front tax break, HSAs give you tax-free medical withdrawals at any age. This gives them a competitive edge over 401(k)s, which require you to pay taxes on all of your withdrawals. If an emergency arises, you can use these funds to help cover your hospital bills. However, if you plan to use your HSA for retirement savings, you want to avoid this whenever possible.

You’re also allowed to make nonmedical withdrawals from an HSA, though you will pay taxes on these, plus a 20% penalty if you’re under 65. That’s a little steeper than the 401(k) early withdrawal penalty, which only charges you 10% if you withdraw your funds if you’re under 59 1/2. But this shouldn’t be a huge problem if you also stash some of your retirement savings in another type of account.

Once you turn 65, HSAs are basically like having another 401(k), with the bonus of tax-free medical withdrawals. This shouldn’t be overestimated, especially because medical costs tend to rise as you age. Being able to pay these bills with tax-free HSA funds can save you a lot compared to using tax-deferred 401(k) funds.

HSAs don’t have required minimum distributions (RMDs)

HSAs also stand out because they don’t have required minimum distributions (RMDs) like 401(k)s do. These are mandatory annual withdrawals that everyone must take from all their retirement accounts, save Roth IRAs, beginning the year they turn 72.

It’s the government’s way of getting its cut of your retirement savings, but sometimes you may not want to withdraw that much from your retirement account. With an HSA, you won’t have to worry about mandatory withdrawals. You can leave your savings in your HSA as long as you’d like so it can continue to grow until you actually need it.

Ready to open an HSA?

If you think an HSA would make a good addition to your retirement plan, you can open one with most banks or brokers. It’s best to choose a provider that will enable you to invest your HSA funds, as this will help them grow more quickly.

It’s up to you to decide when and how much you’d like to contribute to your HSA. You might decide to stick to a 401(k) first if you qualify for an employer match. Once you’ve gotten that, you can switch to your HSA until you’ve maxed it out. Then, if you have any more money you’d like to set aside, you can go back to your 401(k) or use an IRA. Explore a few different scenarios until you find one that works for you.

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