You’ll often hear that it’s important to push yourself to max out your retirement plan contributions. The more money you sock away in an IRA or 401(k), the more you stand to have access to in the future.
And also, traditional IRAs and 401(k) plans give you an immediate tax break on your contributions. So the more money you put in, up to the maximum allowable limit, the less tax you pay on your income.
Now at this point during the year, a lot of people are taking steps to try to eke out more money for their retirement savings so they can either max out for 2022 or get as close as possible. But what if you’re already there?
Maybe you front-loaded your 401(k) contributions and have already hit this year’s limit. Or maybe you finished funding your 2022 IRA long ago, since these accounts come with much lower contribution limits than 401(k)s.
If that’s the case, you shouldn’t give up on saving for the future in a tax-advantaged manner. Rather, there’s another account you can look at that’s loaded with tax benefits. And while it may not seem like a good plan for retirement savings at first glance, if you dig deeper, you’ll see that it most certainly is.
Turn to an HSA
Many people are familiar with flexible spending accounts (FSAs), which let you set aside pre-tax money for near-term medical expenses. Health savings accounts (HSAs) are similar in that they let you save for healthcare expenses in a tax-advantaged manner, only they’re worlds different from FSAs — in a good way.
With an FSA, you must spend down your plan balance every year or risk forfeiting that money. HSAs, on the other hand, let you carry your money forward as long as you want. In fact, HSAs allow you to invest money you don’t need immediately so your balance can grow into a larger sum over time.
Another great thing about HSAs? They’re triple tax-advantaged. The money you put in is tax-free, investment gains are tax-free, and withdrawals are tax-free when used for qualified healthcare expenses. Since healthcare could end up being your largest retirement expense, having funds in an HSA during your senior years could make your lifestyle much easier to afford.
But you’re also not limited to using an HSA just for healthcare in retirement. Because HSAs are so loaded with tax breaks, there are steep penalties for taking a withdrawal for non-medical spending. But once you turn 65, those penalties are waived. And while non-medical withdrawals won’t be tax-free in that scenario, they’ll be comparable to the withdrawals taken from a traditional IRA or 401(k).
A great option to look at
If you’re at the point where you’ve maxed out your IRA or 401(k) while there are still two months to go this year, you’re in a great spot. But that doesn’t mean you have to give up on your long-term savings. If you’re able to carve out money from your November and December paychecks to fund an HSA, you can set yourself up for an even more secure retirement.
That said, before you make plans to fund an HSA, you’ll need to make sure your health insurance plan is compatible with one. That means having an individual deductible of $1,400 or more this year, or a family deductible of $2,800 or more. Your plan’s maximum out of pocket amount also can’t surpass $7,050 for self-only coverage, or $14,100 for family coverage.
But if your health insurance plan renders you eligible for an HSA, then it pays to participate in one. And like 401(k)s, HSAs sometimes come with employer contributions or matches. So you may find that you’re able to walk away with a nice sum in your HSA once you start exploring that option.