The Underrated Retirement Benefits of a Michigan HSA You Need to Know About

As I work with clients in the state, I think a quick background on HSA's is needed again.

Retirement planning is a critical aspect of financial management, and people have differing opinions on the best retirement account to choose. While some believe that 401(k) plans are the best due to the employer match on contributions, others argue that Roth IRA's tax-free withdrawals make it a better choice.  

However, there's one retirement account that's often neglected in such discussions – and that is a Michigan Health Savings Accounts (HSAs). Even though HSAs aren't classified as retirement accounts, they're becoming popular among savers due to the exceptional benefits they offer. Here's what you need to know about HSAs to determine if it's the right fit for your retirement planning. 

 

Understanding the Mechanisms of a Michigan Health Savings Accounts (HSAs) 

Health Savings Accounts (HSAs) are an attractive option for people who want to save for healthcare expenses, and in recent times, for retirement costs too. The account works by allowing individuals to make tax-advantaged contributions, which can be withdrawn at any time. However, to be eligible to contribute to an HSA, you must have a qualifying health insurance plan. 

For the current year of 2023', individuals with an individual health plan that has a deductible of $1,500 or more can contribute up to $3,850 to their HSA, while those with a family plan that has a deductible of $3,000 or more can contribute up to $7,750. If you're aged 55 or older, you can add an extra $1,000 to these limits. 

 

Advantages of Utilizing a Michigan Health Savings Account (HSA) for Saving 

Health Savings Accounts (HSAs) offer a range of benefits, including three significant tax advantages. Firstly, the contributions you make to an HSA reduce your taxable income for the year, similar to a traditional IRA or 401(k) contributions. For instance, if you earned $50,000 in 2023 and made a $5,000 contribution to your HSA, the government would only tax you on the remaining $45,000 when you file your 2023 taxes. This not only lowers your tax bill but could also place you in a lower tax bracket, providing additional tax savings. 

 

One of the significant benefits of using Health Savings Accounts (HSAs) is that they offer three tax advantages.

Firstly, any interest or earnings you earn on your HSA funds grow tax-free. Secondly, you receive tax-free withdrawals when you use the funds for qualified medical expenses at any age. By doing so, you may potentially avoid taxes on your HSA funds entirely if you reserve them for medical costs. 

However, if you use your HSA funds for non-medical purposes, you'll have to pay taxes on them plus a 20% penalty if you're below 65. Although the penalty is relatively steep, you can still make withdrawals for non-medical purposes. When you turn 65, your HSA functions like a traditional IRA with the added benefit of tax-free medical withdrawals. 

Another significant perk of HSAs is that they don't have required minimum distributions (RMDs), unlike most retirement accounts, where the government requires individuals to take annual withdrawals beginning in the yeah they turn 72. This allows you to keep your money in your HSA account without having to make withdrawals that could potentially increase your tax bill during retirement. 

Lastly, some employers offer an HSA match, similar to a 401(k) match, where your employer will contribute money to your HSA when you do so, up to a specific percentage of your income. While HSA matches are less common than 401(k) matches, they're worth taking advantage of if you're eligible for one. 

 

Maximizing Your HSA Benefits: Tips and Strategies 

While dipping into your Michigan HSA account for medical expenses is understandable, it's important to avoid doing this if you're planning to use the funds for retirement. It's best to budget separately for medical costs, preferably in another savings account. 

Keep in mind, investing your HSA funds is another strategy to consider. Check with your HSA provider to see if they offer this option, and switch to a provider who does if not. Investing may accelerate the growth of your money compared to keeping it in a basic bank account. 

Remember to stay updated on the eligibility requirements and contribution limits each year. It's possible that you'll be able to save more money in your HSA in the future, but only if your health insurance policy allows it. If you contribute more than what's permitted, you risk getting into trouble with the IRS. 

Please remember, our agency is not a CPA or do we give out investment advice. If you are interested in a HSA here in the state of Michigan, please ask any your questions to licensed CPA or investment advisor.