Here’s why investment-focused Health Savings Accounts should be on every young woman’s radar.
This article was published on January 14, 2020 on BenefitsPro.com, written by Alison Moore. Photo Source: BenefitsPro.com.
A recent article from Bustle titled “How to Save for Retirement in Your 20s” powerfully explained why saving for the future is one of the best financial decisions young people can make. This is particularly true for women, who typically live longer than men and need their retirement funds to stretch further.
However, according to a recent study by GOBankingRates, women are only contributing half as much to their retirement accounts annually as men are. In addition, women’s median earnings were 81% of men’s in 2018. Until the income gap gets closed for good, women will likely receive less in Social Security benefits, since those benefits are based on individuals’ lifetime earnings.
For these reasons, it is imperative that women establish a strong foundation early in their careers for their retirement savings. If you’re like most people, you probably associate saving for retirement with a 401(k) or IRA. And while 401(k)s and IRAs are great retirement savings vehicles, there’s an often-overlooked vehicle that outshines them both: a health savings account, or HSA.
Simply put, an HSA is a medical savings account that allows account holders to save money on current and future health care expenses. HSAs are individually owned, so you can have one even if your employer doesn’t offer one. You just need to be covered by an HSA-qualified health insurance plan.
HSA contributions are tax-free or tax-deductible, earnings and interest grow tax-free, and withdrawals used to pay for qualified medical expenses are tax-free as well. This trio of tax breaks means HSA account holders can save more money on their health care costs than anybody else.
Many people think of HSAs simply as a way to save taxes on current medical expenses. However, using your HSA as a retirement savings vehicle by investing funds long-term is one of the best things you can do to prepare for the future. Here are three reasons why investment-focused HSAs should be on every young woman’s radar:
1. HSAs give you more money to start saving with.
As you start in your career, you might not have much disposable income, so every dollar counts. And not only do HSAs help you save more money in taxes, they also give you more money to put into your savings.
Remember, you must be enrolled in an HSA-qualified health insurance plan to contribute to an HSA. If you are generally healthy, HSA-qualified plans are perfect because they generally have lower monthly premiums than other health plans. There’s no reason to be paying higher premiums each month for health coverage you don’t use, but that’s what can end up happening with other health plans.
This gives you more dollars to contribute to your HSA now. As you incur more medical costs later in life, you’ll thank yourself for growing your HSA early and putting yourself in a position where you have tax-free funds to use.
2. Retirement medical expenses are real, and HSAs are the best way to pay for them.
Have you thought about how much you’ll spend on health care in retirement? The answer is: a lot. According to HealthView, the average married couple retiring at age 65 should expect to pay over $387,000 in out-of-pocket medical expenses. Medicare isn’t free and doesn’t cover everything, so you want to have a plan in place to cover those additional expenses.
That’s where HSAs come in. While 401(k) or IRA dollars are taxed when withdrawn to cover medical expenses in retirement, HSA funds are tax-free.
Using the numbers above, paying $387,000 in medical expenses with an HSA instead of a 401(k) could save you nearly $100,000 in taxes, assuming a 20% tax rate.
It can be easy to think that a 401(k) is the best way to cover all your costs in retirement, but that’s not the case. By using HSA dollars to pay for your retirement health care costs, you can maximize your tax savings and help your retirement funds last longer.
3. HSA funds can be used for non-medical costs in retirement too.
If you stay healthy in retirement, you might end up with leftover HSA funds you don’t need to spend on medical expenses. Fortunately, once you’re 65 you can use those funds to pay for non-medical expenses with no tax penalty.
HSA funds used for non-medical costs in retirement are treated exactly the same as 401(k) funds; you just pay regular income taxes on them.
This means there’s no reason to only put as much in your HSA as you think you’ll need to cover your health care costs. Even if you end up with leftover funds in retirement, you can use those dollars to pay for non-medical costs just like you would with any other retirement account.
For women in their 20’s, now is the time to begin planting the financial seeds that will grow throughout your working life to be harvested once you retire.
And since they help you save money on your health care costs now, as well as accumulate tax-free funds for the future, HSAs are one of the first seeds you should be planting. Invest in a happy, healthy future now; your future self will be thrilled you did.