Why it’s important to have an HSA if you’re retiring before age 65 | Smart Change: Personal Finances

It is, however, possible for a person to retire before age 65 and at that time no longer be eligible for the health insurance plan offered by their former employer – but they are also not eligible for Medicare. , which leaves her with a void of coverage. Or, they may obtain insurance, but cannot afford a comprehensive enough plan to cover their needs. Either way, it is important to have additional sources of income to help cover health costs.

The older you get, the more likely you are to have medical expenses. It’s an unfortunate but often unavoidable part of aging. Of course, this will vary from person to person, but the time between early retirement and eligibility for Medicare could lead to expensive medical bills without good health insurance. This is where a Health Savings Account (HSA) can really come in handy.

An HSA is a tax-advantaged account you pay pre-tax money into to use for eligible medical expenses if you have a high-deductible health plan (HDHP). You can also contribute after-tax money to an HSA and claim a deduction when you file taxes. Either way, contributing to an HSA will reduce your annual taxable income. For 2022, the contribution limits for an HSA are:

If you’re going to be spending money on medical bills anyway, you might as well set the money aside and take advantage of the tax relief and lower your tax bill at the same time. This will save you money on the back-end.

Although you must be registered with an HDHP to contribute to an HSA, any funds deposited can be used to pay medical expenses even if you are no longer registered. Since you can invest money in your HSA, it’s more than just a savings account. Although, if you’re nearing retirement and planning to use up your HSA funds soon, be careful not to leave too much in stocks because you could find yourself at the unfortunate end of stock market volatility and plummeting. your HSA savings.

However, if you’ve made consistent contributions to your HSA throughout your career, you can likely accumulate a sizable amount that will help supplement the medical costs you experience between early retirement and Medicare eligibility and beyond.

Say you contributed $300 per month to a fund in your HSA, with an average annual return of 8% over 15 years. After 15 years, you would have accumulated over $97,700, even though you personally only contributed $54,000. If you were enrolled in a family plan and contributed $600 per month during that time with the same returns, you would have accumulated nearly $195,500 while personally contributing only $108,000.

HSAs offer both front-end and back-end benefits. Not only can you reduce your taxable income by making contributions, but you can also invest those contributions, allowing them to grow and accumulate with the possibility of tax-free withdrawals. If you are eligible to contribute to an HSA, you should definitely consider it. It might not be useful today or tomorrow, but your future self will surely thank you for it, especially if you find yourself retiring early.

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