Healthcare costs can skyrocket in retirement, and Medicare only covers so much. A Health Savings Account (HSA) allows you to set aside pre-tax money to pay for qualified medical expenses like deductibles, copayments, and coinsurance to help cover your healthcare costs. An HSA is a great retirement planning tool, especially when paired with an IRA (Individual Retirement Account). And so, here are some of the potential benefits of pairing your IRA with a Health Savings Account.
Contributions to HSA accounts are tax deductible. You can contribute up to $3,500 a year if you have individual health insurance coverage, and $7,000 if you have family coverage. If you are over 55, you or an employer can contribute an additional $1,000 per year if you have a qualifying high-deductible medical insurance policy. For individual coverage, the deductible must be at least $1,350, and for family coverage, $2,700.
Using a qualified HSA funding distribution (QHFD), you can fund an HSA with a traditional, Roth, or Simple IRA or SEP by rolling over funds. There is no early distribution penalty if you’re under 59 ½. You can only do this once in your lifetime, regardless of how many IRAs you have. First, you may need to consolidate funds into one IRA in order to transfer the amount you want. The rolled over funds count towards the annual contribution limit. The rollover is tax free, and an HSA has even better tax benefits than an IRA. But it must be direct – if you take a distribution and then transfer it to an HSA, it will be taxed. It will also be taxed if you lose HSA eligibility in the 12 months after making the QHFD.
The amount that can be transferred from a Roth IRA is limited to accumulated investment income because only pre-tax money can be transferred. Nondeductible IRA contributions can’t be transferred to an HSA and there is no tax deduction for a QHFD. You can use inherited IRA accounts to make a QHFD, and a QHFD counts towards an RMD, if you want to make the most of your RMD.
Funding a Health Savings Account with an IRA is a tax-efficient and convenient way to save for healthcare costs in retirement. Making a QHFD can help maximize the benefit of an HSA by sheltering contributions from tax and allowing them to grow from being invested.
Planning for healthcare costs can be an important part of a retirement plan. With so many options to consider, it helps to have a professional to guide you through complex decisions. At Madrona Financial, we can help you create a plan make your money last for medical expenses that may appear in retirement. Click here to schedule your no cost, no obligation financial review.