You will often hear that it is important to push yourself to maximize your contributions to your retirement plan. The more money you invest in an IRA or 401(k), the more access you will have in the future.
And also, traditional IRA and 401(k) plans give you immediate tax relief on your contributions. Thus, the more money you invest, up to the maximum authorized limit, the less tax you pay on your income.
Now, at this point in the year, a lot of people are taking steps to try to make more money for their retirement savings so they can either max out for 2022 or get as close to it as possible. But what if you’re already there?
Perhaps you have preloaded your 401(k) contributions and have already reached this year’s limit. Or maybe you finished funding your 2022 IRA a long time ago, since these accounts come with much lower contribution limits than 401(k).
If so, you shouldn’t give up on saving for the future in a tax-efficient way. Instead, there’s another account you can check out that’s packed with tax benefits. And even if it doesn’t seem like a good retirement savings plan at first glance, if you dig deeper, you’ll see that it certainly is.
Call an HSA
Many people are familiar with Flexible Spending Accounts (FSA), which allow you to set aside pre-tax money for short-term medical expenses. Health savings accounts (HSA) are similar in that they allow you to save for healthcare expenses in a tax-efficient way, but they are very different from FSAs – in a good way.
With an FSA, you have to spend your plan balance each year or risk losing that money. HSAs, on the other hand, allow you to defer your money for as long as you want. In fact, HSAs allow you to invest money you don’t need right away so your balance can grow over time.
Another great thing about HSAs? They benefit from a triple tax advantage. Money you invest is tax-free, investment gains are tax-free, and withdrawals are tax-free when used for eligible healthcare expenses. Since health care could end up being your biggest retirement expense, having funds in an HSA during your retirement years could make your lifestyle much more affordable.
But you’re also not limited to using an HSA just for retirement healthcare. Because HSAs are so loaded with tax breaks, there are steep penalties for taking a withdrawal for non-medical expenses. But once you reach 65, those penalties are lifted. And while non-medical withdrawals won’t be tax-exempt in this scenario, they will be comparable to withdrawals made from a traditional IRA or 401(k).
A great option to watch
If you’re at the point where you’ve maxed out your IRA or 401(k) with two months left this year, you’re in the perfect spot. But that doesn’t mean you have to give up your long-term savings. If you are able to withdraw money from your November and December paychecks to fund an HSA, you can prepare for an even safer retirement.
That said, before you plan to fund an HSA, you need to make sure your health insurance plan is compatible with it. That means having an individual deductible of $1,400 or more this year, or a family deductible of $2,800 or more. Your maximum plan amount also cannot exceed $7,050 for personal coverage or $14,100 for family coverage.
But if your health insurance plan makes you eligible for an HSA, it pays to participate. And like 401(k)s, HSAs are sometimes accompanied by contributions or counterparties from the employer. So, you may find that you are able to walk away with a nice sum in your HSA once you start exploring this option.