Suze Orman Crowns HSAs Retirement Royalty – Is She Right?

Financial guru Suze Orman hails health savings accounts (HSAs) as top-tier retirement vehicles, but can they help you save for your golden years?

HSA contributions offer a triple tax advantage. They reduce your current taxes, grow tax-free and can be withdrawn tax-free for qualified medical expenses. HSAs cover almost everything except for some dental services and other items.

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"Can you imagine putting money in and getting a tax write-off for it and using it tax-free? There is not one other retirement account that offers that benefit," Orman said during an episode of her podcast "Women & Money."

An HSA is designed for health care costs and shouldn't replace traditional retirement accounts like a 401(k) or an individual retirement account (IRA). Orman advises using it to complement your existing retirement savings strategy.

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An HSA lets you save money for qualified medical expenses if you have a high-deductible health plan. Think of it as a special savings account with tax advantages. Here's how it works:

• Contributions: You can contribute pretax dollars to your HSA, reducing your annual taxable income.
• Tax-free growth: The money in your HSA grows tax-free, allowing your savings to stretch further.
• Tax-free withdrawals: When you use the funds for qualified medical expenses, like deductibles, copays, coinsurance or even some dental, vision and prescription drug costs, the withdrawals are tax-free.

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Many employers offer HSAs and may contribute to your account each year, further boosting your savings. According to a 2022 survey by the Plan Sponsor Council of America, three-quarters of employers offer HSA contributions, and 60% provide investment options within the accounts. Just remember that any employer contributions count toward your annual contribution limit.

Individual HSAs are available from banks, credit unions and insurance companies.

In 2024, you can contribute up to $4,150 to an HSA if you're single or $8,300 if you're married and filing jointly.

If you're 55 or older, you can contribute an extra $1,000. Beyond the tax benefits, HSAs offer another significant advantage – they can help you fund your health care costs in retirement.

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Fidelity Investment estimates that a 65-year-old retiree can expect to spend an average of $157,500 on health care throughout retirement. With an HSA, you can save for these expenses tax-free.

Unlike traditional retirement accounts, HSAs have no required minimum distributions. This means your money can grow tax-free without mandatory withdrawals, providing flexibility for when you actually need the funds.

Even if you don't use your HSA for medical expenses, you can still access the money after age 65. While you'll still owe income tax on the withdrawal, it won't be subject to penalties. Orman notes that this isn't a major drawback.

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"You get to take the money out without any penalty whatsoever," Orman said. "However, now you will pay ordinary income tax on it, but that's not such a big deal because that's almost exactly like a traditional IRA or traditional 401(k)."

There are some important caveats to consider. If you withdraw money from your HSA for nonmedical expenses before age 65, you'll face a 20% penalty on top of regular income taxes. You also can't contribute to an HSA once enrolled in Medicare.

While an HSA might not replace your other retirement accounts, it can be a valuable addition. To determine whether an HSA is right for you, it's wise to consult with a financial advisor.

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