In today’s world, a one-size-fits-all idea of retirement doesn’t fit everyone. Rather than defining retirement as the total conclusion of a 40-year working career, individuals are increasingly retiring early, taking multiple smaller retirements, or working longer and only partially retiring.
Thankfully, there’s a savings vehicle that offers specific benefits for each of these retirement concepts. Health savings accounts, or HSAs, provide powerful features to help account holders easily reach their successful version of retirement, whatever that looks like.
HSAs and traditional retirement
This is what most people think of when they think of retirement: working until age 65, then not working for the rest of your life. By putting away funds for retirement during your working career, you earn time later in life to relax, spend time with family, and pursue hobbies.
For these individuals, HSA tax savings can have a significant benefit. Not only are HSA contributions tax-free or tax-deductible, HSA funds grow tax-free and can be withdrawn tax-free to pay for qualified medical expenses. By taking advantage of HSA tax breaks, individuals can save money on their medical costs and free up other funds to put away for retirement. And if they choose, they can even use HSA funds to cover health care expenses in the future.
Additionally, one HSA can be used to pay for medical expenses incurred by anyone in your family. As an HSA account holder, you can cover your spouse and tax dependents’ health care costs tax-free with your HSA, even if they are on a different health plan. You can also change your contribution level midyear, unlike an FSA, where you have to set a defined contribution amount for the entire year. This flexibility allows HSAs to easily fit individuals’ changing spending and saving needs throughout their journey toward retirement.
HSAs and early retirement
This version of retirement has gained popularity in part from the FIRE (Financial Independence, Retire Early) movement. By advocating a frugal lifestyle and saving a large portion of your paycheck, this movement allows individuals to potentially stop working much earlier than 65.
For individuals pursuing early retirement, it is vital to get money invested quickly and take advantage of compound interest over time. HSAs are appealing here because they have no use-it-or-lose-it limits and can be invested just like a 401(k) or IRA. This maximizes individuals’ ability to grow funds and reach financial independence as soon as possible. For these individuals, choosing an HSA provider that offers funds with low expense ratios is also a key, since those often-overlooked fees can take a big bite out of their savings.
Individuals pursuing early retirement are eagle-eyed about getting all the tax savings they can, and HSA contributions offer more tax savings than 401(k) or IRA contributions. HSA account holders who make pretax HSA contributions via their employers’ Section 125 plans unlock FICA tax savings on those contributions; that’s an extra 7.65% back in your paycheck. This additional money-saving opportunity makes HSAs a popular choice with individuals looking to retire early.
HSAs and mini-retirement
This view of retirement entails taking temporary breaks in working to travel or pursue hobbies, then going back to work afterward. Rather than having one large retirement after 40 to 45 years of working, this concept breaks retirement up into smaller pieces throughout your life.
Because of their periods of not working, advocates of mini-retirement may end up changing jobs many times during their lives. HSAs shine here because they are individually owned, which makes them portable. Unlike FSAs, which stay with your employer, your HSA comes with you from job to job, making it easy to keep saving.
Because of their mini-retirements and subsequent new jobs, these individuals also might find themselves switching health insurance plans often or potentially not having health insurance. While the ability to contribute additional HSA funds is dependent on having an HSA-qualified health plan, account holders never lose the ability to spend the current funds in their account. That means as long as account holders have funds in their HSAs, they will be able to pay for their medical expenses tax-free, even if their insurance situations change.
HSAs and semiretirement
This version of retirement is for people who don’t see themselves completely stopping working. Their financial situation may require a longer career, or they may love what they do and keep working by choice. Either way, these people don’t experience the complete ending of work that is typical of traditional retirees.
Because HSAs don’t have required minimum distributions, they’re ideal for people in this stage. They never have to withdraw funds from their HSAs before they need to, like they will with a traditional 401(k) or IRA. Their HSA funds can keep growing until they choose to withdraw them.
In addition, after HSA account holders turn 65, they can withdraw HSA funds for nonmedical expenses and only pay regular income taxes. For individuals who are working longer, this offers additional flexibility on how their HSA funds can be used. They never need to worry about having more HSA funds than health care costs, because they can easily use their HSA dollars on nonmedical expenses.
These days, retirement might look like 20 years of frugal living so you can stop working at 45, taking breaks from work every five years, or continuing to pursue the work you love into your later years. However, no matter what retirement means to you, the robust feature set and unparalleled tax savings offered by your HSA will help you get there.
James Denision is marketing director at HealthSavings Administrators, an HSA provider.