Many people struggle to contribute any money at all to an
IRA or 401(k) plan. If you're currently maxing yours out, consider yourself
ahead of the game. But what if you still have the financial leeway to sock
money away for the future? Are there other accounts that offer tax benefits
comparable to what you'll find in an IRA or 401(k)?
Thankfully, there's one account in particular that, believe
it or not, offers superior tax benefits on the road to building long-term
wealth: the health savings account (HSA). If you qualify to contribute to one,
it pays to take advantage.
How HSAs work
An HSA is a hybrid savings and investment account. With an
HSA, you can contribute funds to cover near-term medical expenses, but any
money you don't need right away can be invested and carried forward into the
future. In fact, HSA funds never expire, so you can use one of these accounts
to build retirement wealth during your working years.
HSAs are also triple tax-advantaged:
- Contributions are tax-free
- Investment gains in your account are tax-free
- Withdrawals are tax-free as long as they're used
to cover qualified medical expenses
Here's another great feature of HSAs: If you're under 65 and
withdraw funds for nonmedical purposes, you'll be hit with a 20% penalty, but
once you turn 65, you can remove funds from an HSA for any reason and avoid
that penalty entirely. The only catch is that your distributions will be
subject to taxes, but the same would hold true for distributions taken from a
traditional IRA or 401(k). In fact, if your healthcare expenses in retirement
are ultimately lower than expected, you can effectively treat your HSA like
your IRA or 401(k).
Can you fund an HSA?
HSA participation hinges on enrollment in a high-deductible
health insurance plan, so not everyone will qualify. In 2021, you'll need an
individual deductible of $1,400 or more, or a family deductible of $2,800 or
more, to contribute.
If you do qualify, you'll be allowed to put in up to $3,600
on your own behalf, or up to $7,200 on behalf of your family. If you're 55 or
older, you'll get a $1,000 catch-up as well.
Let's say you're 35 years old and already maxing out your
regular retirement plan. If you were to put $3,000 a year into an HSA over the
next 30 years, and your HSA investments were to deliver an average annual 7%
return (a bit below the stock market's average), you'd wind up with over
$283,000 to use in retirement -- assuming that you don't take withdrawals along
the way. When combined with your regular savings, that sum could set you up
quite nicely as a senior. If you're eligible for an HSA, be sure to sign up.
Many people participate in HSAs through their employers. If that's not an
option, but your health plan qualifies, you can open one independently and
start reaping the benefits.
The $16,728 Social Security bonus most retirees completely
overlook
If you're like most Americans, you're a few years (or more)
behind on your retirement savings. But a handful of little-known "Social
Security secrets" could help ensure a boost in your retirement income. For
example: one easy trick could pay you as much as $16,728 more... each year!
Once you learn how to maximize your Social Security benefits, we think you
could retire confidently with the peace of mind we're all after
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