It is estimated that a 65-year-old couple retiring now will spend $275,000 on health care, not including long-term care. That is in today’s dollars, so imagine what those costs will be in the future. The best way to help protect your nest egg is with a sizable HSA balance.

Your HSA is a great way to cover current medical expenses while receiving a tax break, but if you are able to pay for these expenses out of pocket today, it can be a huge benefit for the future.

Why, because HSA’s come with a what we call a triple tax break:

  1. Deduction for contributions
  2. Tax-free growth
  3. Tax-free withdrawals for qualified health care spending

Let’s take a closer look at these three areas.

  1. Contributions are on a pre-tax basis, meaning that they reduce your federal and state income tax liability and they’re not subject to FICA taxes. In addition, any contributions your employer makes do not have to be counted as part of your taxable income. At age 55, HSA owners can make an additional $1,000 catch-up contribution.
  2. Just like your 401(k) and IRA’s your account balance grows tax-free. Interest, dividends, or capital gains you earn are nontaxable. This is the key to success with HSA retirement planning, earnings growth!
  3. Withdrawals for qualified medical expenses are tax-free. This is why an HSA is superior to a traditional 401(k) or IRA’s as a retirement vehicle. If you spend on qualified medical expenses, you NEVER pay taxes on these dollars. Outlined below are just a few of these expenses:
  • Office-visit co-payments
  • Health insurance deductibles
  • Dental expenses
  • Vision care (eye exams and eyeglasses)
  • Prescription drugs
  • Medicare part A, B, D & HMO premiums
  • Some costs of the premiums for a tax-qualified long-term care insurance
  • Hearing aids
  • Hospital and physical therapy bills
  • Medical Supplies
  • In-home nursing care
  • Retirement Community fees for lifetime care
  • Long-term care services
  • Meals and lodging that are necessary while obtaining medical care away from home
  • Modifications that make your home easier to use as you age, such as ramps, grab bars, and handrails.

Another benefit is the IRS does not require you to take distributions from your HSA in any year, before or during retirement.