More Americans are using a trick that can help you save money for retirement—there’s just 1 catch

More and more Americans are using a health save account ( HSA ) : As of January 2017, 21.8 million people had opened a HSA, a 9 percentage addition in registration from 2016. Besides being a commodity way to save money on health care costs, HSAs can supplement your retirement savings. “ It ‘s kind of like this retirement loophole magic trick, ” says certified fiscal planner at Betterment Nick Holeman.

While HSAs are not intended to be used for retirement — they ‘re designed to help you pay for qualifying healthcare expenses — they ‘re a tax-friendly investment vehicle that can act as a mighty retirement-savings instrument if you let your balance colonial over years. There is one overtake : You can only contribute money to an HSA if you have a high-deductible health care design ( HDHP ), one that has a lower monthly bounty and a higher deductible, or amount you must pay for your aesculapian care before policy kicks in. Whether or not you have access to an HSA “ is truly employer-decided, ” says Andrew Crowell, vice president of Wealth Management at D.A. Davidson. “ This is just a benefit that ‘s available to the employees of companies that fall within a high-deductible health design. ” note that if you ‘re freelance or if your company does not offer a health plan, you may be able to contribute to an HSA if you ‘re enrolled in an HSA-qualified high deductible health insurance plan. even if you do have an HDHP, these plans are n’t for everyone, Holeman notes : “ If you are on medications, have a chronic illness or if you ‘re older — anything where you might be going to the repair a lot — then having a high-deductible will probably be very expensive for you. typically, it only makes sense if you ‘re healthy and you do n’t use the sophisticate very much. ” Before signing up for an HDHP, you ‘ll want to sit down and ask yourself a few questions, says Holeman : “ How frequently do you go to the doctor of the church ? Do you have a guard net that ‘s large adequate so that if you do need to pay the high deductible, you can pay that out of pocket without having to eat rice and beans for a calendar month ? ” If an HDHP is right for you, you should consider opening an HSA bill. here ‘s why :

You get a triple tax benefit

HSAs offer significant tax advantages : 1. The money is tax deductible when you put it in. As with a 401 ( kelvin ), you contribute pre-tax dollars to an HSA and you get a tax write-off whenever you make a contribution. Deductions reduce your taxable income, which could place you in a lower tax bracket. For 2019, the HSA contribution limit is $ 3,500 per year if you ‘re single and $ 7,000 per year if you have a family. If you ‘re 55 or older, you can make an extra $ 1,000 “ catch up ” contribution. This is much less money than you can put into traditional retirement savings vehicles : With a 401 ( thousand ) plan, the contribution specify for 2019 is $ 19,000 if you ‘re under old age 50 and $ 25,000 if you ‘re 50 or older. For traditional and Roth IRAs, the maximum annual contribution is $ 6,000, or $ 7,000 for people age 50 or older. That means that saving in an HSA alone wo n’t be enough to fund your retirement, Holeman notes, “ but it can be a nice addition to your normal retirement savings. ” 2. Your earnings grow tax-free. When you contribute to an HSA, you can invest your funds, and whatever interest you earn is tax-exempt. Since your HSA is not tied to your employer in the manner of a 401 ( kelvin ), you can choose whatever supplier you want. “ typically, the [ HSA ] providers offer common funds — some more aggressive than others — but a compass of reciprocal funds or index funds that the contributions could be invested in, ” says Crowell. When choosing how you want to invest your money, do your homework and denounce about. Fees and investment options matter. note that some accounts will require a minimum balance. HSASearch lets you compare hundreds of providers.

3. You can take the money out tax-free if you use it for qualified medical expenses. If you ‘re withdrawing the funds for qualify aesculapian expenses, you get to take it out tax-exempt. The list of qualify expenses, which you can find on the IRS web site, “ are pretty wide, ” says Crowell, and include things like co-payments, influenza shots, roentgenogram fees and physical therapy. “ reasonably much any sophisticate travel to would be covered, and typically, dental and vision are besides considered qualified medical expenses, ” which would include things like braces, tooth cleanings and contact lenses. That said, “ you want to make sure you ‘re not pushing the boundaries of what ‘s considered a medical expense, ” because if you use your HSA funds for something other than qualify checkup expenses, Crowell says, you ‘ll be hit with a 20 percentage tax penalty. “ This is not an area where you ever want to get in the grey zone because the penalties are cadaver. ” If you ‘re over senesce 65, however, you can make withdrawals to cover non-medical expenses. The 20 percentage penalty is waived and the distribution would good be taxed at your regular rate. Keep in mind that while most states align with the union tax laws around HSAs, not all of them do. California and New Jersey, for model, tax contributions at the country level — plus, residents owe taxes on any interest, dividends or capital gains earned in their HSA .

There’s no ‘use it or lose it’ policy

Unlike a health care FSA ( flexible spending report ) — another tool that lets you set aside pre-tax money to pay for eligible checkup expenses — you do n’t have to use the money you contribute to an HSA within a certain time cross. Crowell explains : With an FSA, “ whatever dollars you had put away pre-tax in this calendar year are not going to roll over into the following calendar class. You merely lose it. ” With an HSA, the funds do n’t disappear. In fact, they can keep compound. Plus, “ there ‘s actually no necessitate minimum distributions flush when person reaches their senior years, ” he says. “ With a traditional IRA, for model, at senesce 70 ½, there are required minimum distributions that kick in. The IRS considers that money has been tax-exempt for long enough and sol they tell the holder how much has to come out each year so it can be taxed. ” If your money is in an HSA, though, “ it can equitable sit there and grow and grow and grow over time without being forced to be drawn down, so it can be the final bucket tapped for person ‘s retirement savings. ” HSA plans are besides “ portable, ” he adds, “ which means, if you change jobs, the HSA can follow you. It ‘s your score. You do n’t lose the benefit because you change companies. Or, if your company changes indemnity plans, again, it ‘s still your funds and your HSA. ”

Should you use an HSA to save for retirement?

Before using an HSA as a retirement save joyride, take broad advantage of your 401 ( potassium ) plan if you have one, says Crowell. That means contributing adequate to get the entire company couple. One of the disadvantages of using an HSA for retirement is that the contribution limits are broken, he points out : “ For an individual in 2019, it ‘s $ 3,500. If that individual is over 55, they can add an extra $ 1,000, so the soap for an individual would be $ 4,500, which is typically a set lower than their retirement plan would offer. And there ‘s no couple. ” For those reasons, “ first, save in that 401 ( kilobyte ) plan and get all the coordinated dollars you can, ” he says. “ then, if you have extra dollars that your budget allows you to save, an HSA is a great secondary instrument. ” Don’t miss: How much money you need to save to retire by age 65, according to Stanford researchers Like this story? Subscribe to CNBC Make It on YouTube! correction : The history was updated to clarify that if you ‘re freelance or if your party does not offer a health plan, you may be able to contribute to an HSA if you ‘re enrolled in an HSA-qualified high deductible health indemnity plan.

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