Why is it important to have an HSA if you retire before 65 | Smart Switch: Personal Finance

(Stefon Walters)

Medicare is the United States health insurance program for people age 65 and older (with some exceptions for people with permanent kidney failure and other disabilities). During your working years, you and your employer each pay 1.45% Medicare tax on all earnings, and once you turn 65, you can start reaping benefits if the program helps with medical expenses . Medicare won’t cover all medical expenses or most long-term care, but it will provide some however, financial aid.

However, there is the possibility that someone retires before age 65 and at that point is no longer eligible for the health insurance plan offered by their previous employer, but they are also not eligible for Medicare yet, leaving them with a coverage gap. Or, they may get insurance but can’t afford a plan comprehensive enough to meet their needs. Whatever the case, it’s important to have additional sources of income to help cover health care costs.

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Get rewarded for saving for medical expenses

As you age, you are more likely to have medical expenses. It is an unfortunate but often unavoidable part of aging. Of course, it will vary from person to person, but the time between someone retiring early and becoming eligible for Medicare could lead to expensive medical bills without good health insurance. That’s where a health savings account (HSA) can really help.

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An HSA is a tax-advantaged account where you contribute pre-tax money for qualified 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 your taxes. In either case, contributing to an HSA will reduce your annual taxable income. For 2022, the contribution limits for an HSA are:

Type of coverage contribution limit Catch-up contribution limit for age 55 and older
only for himself $3,650 $4,650
Family $7,300 $8,300

If you’re going to spend money on medical expenses regardless, you might as well set aside the money and get tax-exempt and lower your tax bill at the same time. This will save you money on the back end.

Using an HSA to supplement potential costs

Although you must be enrolled in an HDHP to contribute to an HSA, funds deposited can be used to pay for medical expenses even if you are no longer enrolled. since you can invest money in your HSA, is more than just a savings account. However, if you’re nearing retirement and planning to use your HSA funds soon, be careful not to leave too much in stocks because you may find yourself on the unlucky end of stock market volatility and have your HSA savings eroded. crash.

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

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Let’s say you contributed $300 a month to a fund within your HSA, averaging 8% annual return for 15 years. After 15 years, you will have accumulated more than $97,700, even if you only contributed $54,000 personally. If you are enrolled in a family plan and contributed $600 a month during that time with the same returns, you would have accumulated about $195,500 and would only personally contribute $108,000.

keep the future in mind

HSAs provide starting and ending 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’re eligible to contribute to an HSA, you should definitely consider it. It may not be useful today or tomorrow, but your future self will surely thank you, especially if you retire early.

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