In today’s world, a “one-size-fits-all” retirement concept is not for everyone. Rather than defining retirement as the complete end of a 40-year working career, individuals are increasingly taking early retirement, taking several smaller retirements, or working longer, but only partially.
Fortunately, there is a savings instrument that offers specific advantages for these retirement concepts. Health Savings Accounts or HSAs offer powerful features that help account holders easily achieve their version of a successful retirement in any form.
HSAs vs. traditional pension systems
That’s what most people think about when they consider retirement: working until age 65 and then not working for the rest of their lives. By saving for retirement during your working life, you can gain time later in life to relax, spend time with your family and enjoy leisure activities.
Not only are HSA contributions tax-exempt or tax-deductible, but HSA funds can grow tax-free and be withdrawn tax-free to cover eligible medical expenses. By taking advantage of the tax benefits of HSA, individuals can save money on medical expenses and free up additional funds for retirement. And if they wish, they can even use SAH funds to pay for future medical expenses.
In addition, a HSA can be used to pay the medical expenses of the whole family. As a HSA account holder, you can use a HSA to pay for the medical expenses of your spouse and dependents tax-free, even if they are covered by another health plan. You can also change your contribution level mid-year, unlike an HSA where you have to set a fixed contribution amount for the entire year. This flexibility allows HSAs to easily adapt to an individual’s changing spending and saving needs throughout the retirement process.
HSA and early retirement
The popularity of this version of retirement is due in part to the FIRE (Financial Independence, Early Retirement) movement. By encouraging a thrifty lifestyle and saving a large portion of one’s salary, this movement allows individuals to stop working before age 65.
For those who wish to take early retirement, it is important to invest quickly and take advantage of compound interest over time. HSAs are interesting here because they have no restrictions on use or loss and can be invested like a 401(k) or IRA. This maximizes an individual’s ability to grow their money and achieve financial independence as quickly as possible. For these individuals, it is also essential to choose an HSA provider that offers funds with a low expense ratio, as these often overlooked fees can take a significant portion of their savings.
HSA account holders who make pre-tax HSA contributions through their employer’s Section 125 plan can take advantage of the tax savings from IFAC on these contributions, which is an extra 7.65% of your salary. This additional opportunity to save money makes HSA a popular option for people looking to take early retirement.
SAHs and mini retirement plans
This view of retirement requires taking a break to travel or pursue a hobby and then returning to work. Rather than having just one big retirement after 40 to 45 years of work, this concept divides retirement into smaller pieces over the course of a lifetime.
Due to periods when they are not working, supporters of mini retirement can find themselves changing jobs several times in their lifetime. HSAs shine here because they are personally owned, making them portable. Unlike an ASP, an HSA stays with your employer and your HSA changes as you work, making it easier to keep your savings.
Because of their mini retirement and new jobs, these individuals may also find themselves changing health insurance plans frequently or not having one at all. Although the ability to contribute additional HSA funds depends on the availability of a HSA-eligible health plan, account holders never lose the ability to use the existing funds in their accounts. This means that as long as the account holder has money in their HSA, they will be able to pay their medical bills tax-free, even if their coverage changes.
SAH and Semi-Retirement
This version of retirement is for those who don’t see themselves stopping working. Their financial situation may require a longer career, or they may enjoy their work and choose to continue working. In either case, these people will not experience the complete end of work that is typical of traditional retirees.
Because HSAs have no minimum distribution requirements, they are perfect for this stage of life. They are not required to withdraw funds from their HSA before they need them as they do with a traditional 401(k) or IRA. Their HSA funds can continue to grow until they choose to withdraw them.
In addition, when SAH account holders reach the age of 65, they can withdraw HSA funds for non-medical expenses and pay only the normal income tax. For people who work long hours, this offers additional flexibility in the way they use their HSA funds. They do not have to worry if HSA funds exceed medical expenses because they can easily use HSA funds for non-medical expenses.
Retirement today can feel like 20 years of frugality, so you can stop working at age 45, take a break every five years, or continue to do the work you love in your later years. However, whatever retirement means to you, the robust features and unprecedented tax savings your CSS offers will help you achieve that goal.
James Denision is Director of Marketing for HSA HealthSavings Administrators.