We generally suggest keeping two to three years' worth of routine medical expenses in cash, cash investments, or similar low-volatility investments within your HSA.
The amount of money you should have in your HSA during retirement depends on your healthcare needs and circumstances. According to the Fidelity Retiree Health Care Cost Estimate, a single person who is age 65 in 2023 should aim to have about $157,000 saved (after tax) for healthcare expenses during retirement.
If you're unsure of where to start, try working with a financial advisor. What Is the Average HSA Balance By Age? The average HSA balance for a family is about $7,500 and for individuals it is about $4,300. This average jumps up to $12,000 for families who invest in HSAs.
What happens if I contribute to my HSA more than the maximum annual limit that the IRS allows? HSA contributions in excess of the IRS annual contribution limits ($3,600 for individual coverage and $7,200 for family coverage for 2021) are not tax deductible and are generally subject to a 6% excise tax.
Once you turn 65, you can use the money in your HSA for anything you want. If you don't use it for qualified medical expenses, it counts as income when you file your taxes. Six months before you retire or get Medicare benefits, you must stop contributing to your HSA.
Finally, consider which account will give you the most tax benefits. An HSA is taxed in essentially the same way as a 401(k), except it also includes tax-free medical withdrawals, so in that sense, the HSA wins.
Because HSAs come with several tax benefits that could save you money, you may want to consider contributing as much as you can to your HSA.
$4,868: Average HSA account balance at the end of March 2024, according to Bank of America's 1Q 2024 Participant Pulse study. That's up from $4,380 at the end of 2023. 2.9 million: Number of accounts that have at least a portion of their HSA dollars invested, representing about 8% of all accounts, according to Devenir.
If you're able to make the maximum contribution each year, then it's suggested that you do so. Some years you may need to use more of your HSA contributions than other years. Just remember, there's no yearly minimum you have to spend from your HSA and your entire HSA automatically rolls over each year.
Unlike many flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs), unused HSA funds automatically carry over to the following year. Even if your employer provided the account and made contributions, the account belongs to you — so any remaining funds are carried over every year.
Contributing the maximum annual contribution and investing for the long term is the best way to get the most benefit from your HSA. Avoid using the HSA as your emergency fund because nonqualified withdrawals are subject to ordinary taxes and possibly penalties.
Making contributions through your employer's payroll can provide added tax benefits — HSA contributions are not subject to the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) taxes, which amounts to a typical savings of 7.65% (subject to limits of the Social Security Wage Base).
Contribute at least the amount of your deductible
You'll be responsible for paying for health care expenses out of pocket until your annual deductible is met, so consider contributing at least the amount of your deductible to your HSA.
Will my HSA account remain open if I have a $0 balance? The account will remain open if you have a $0 balance.
Your HSA also covers expenses for standard dental cleanings and dental check-ups. One thing to keep in mind is that some of these procedures may have a co-payment, so it's important that you check with your dental insurance provider to find out exactly what you'll have to pay out of pocket.
Still, despite workers spending more on health care in 2022 than in previous years, average balances in HSAs increased, rising from $4,318 in 2021 to $4,607.
For calendar year 2024, a “high deductible health plan” is defined under § 223(c)(2)(A) as a health plan with an annual deductible that is not less than $1,600 for self-only coverage or $3,200 for family coverage, and for which the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not ...
Are HSA contributions tax deductible? In short, contributions to an HSA made by you or your employer may be claimed as tax deductions, even if you don't itemize deductions on a Schedule A (Form 1040). Additionally, contributions made by your employer may be tax-free and excluded from your gross income.
Drawbacks of HSAs include tax penalties for nonmedical expenses before age 65, and contributions made to the HSA within six months of applying for Social Security benefits may be subject to penalties. HSAs have fewer limitations and more tax advantages than flexible spending accounts (FSAs).
First off, most experts would recommend maxing out HSA contributions before maxing out 401(k) contributions because of the tax advantages that come with the HSA. There's no minimum age for HSA fund distributions, so when you need it to spend money on health care, it's got your back.
If you are retiring at the age of 65 ½ or older, to avoid potential tax issues, you want to STOP YOUR HSA CONTRIBUTIONS so that you have 6 months of NO contributions before you FILE FOR MEDICARE. Please keep in mind that the EMPLOYEE and EMPLOYER contributions do appear in the “look-back period”.
Generally, if you're younger and/or healthier, an HSA could definitely be worth it. What's in it for you is major healthcare coverage, potentially lower insurance premiums, and a tax-deferred account that can grow over time.
How you use your HSA really depends on your health care needs and longer‑term goals. It's all about balance: Spend when you need to and save as much as you can to take advantage of the benefits of your HSA that can help you be ready for the future.
Try to invest as much of your HSA money as possible while ensuring that you keep enough cash to cover your qualified medical expenses. Consider where your other retirement plans are invested as well to make sure that your HSA investments provide diversification. Avoid taking out funds from your HSA as much as possible.