How retirees can save money with an HSA

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If you’re eligible for a health savings account (HSA), it’s a terrific way to save money now and accumulate wealth for the future—if you understand the rules. Last year, the CARES Act expanded the types of products and services you can purchase using an HSA. Don’t miss the opportunity to save on many new allowable expenses using this tax-advantaged account.


One of my favorite tax-advantaged accounts is a health savings account, or HSA, for short. Not only does an HSA allow you to pay for a wide variety of healthcare expenses with pre-tax dollars, but you can spend it any way you want after your 65th birthday. It’s a clever, legal way to pay less tax, save more, and invest for the future.


All that said, having an HSA comes with strict rules you must follow or pay a hefty penalty. This post will cover terrific tax benefits you get from an HSA, updates on new (and often surprising) allowable expenses, and tips for using an HSA to build wealth for retirement.

What is a health savings account (HSA)?

An HSA is a tax-free account for the sole purpose of paying allowable healthcare expenses. But to qualify, you must have a particular type of health insurance, which I’ll cover in a moment (see “Who qualifies for an HSA?” below).

You can contribute to an HSA if you purchase an HSA-eligible health plan on your own or through an employer’s group plan. You always own and manage an HSA as an individual, and there are no income limits to qualify.


In other words, you don’t need permission from an employer or the IRS to set up an HSA, and it stays with you if you change jobs or become unemployed. Even if you lose your HSA-eligible insurance, you can continue spending your HSA balance, but you’re not eligible to make any new contributions to the account.


The beauty of an HSA is that contributions are deductible on your tax return even if you don’t itemize deductions. The funds can earn interest, or you can invest some or all of them for potential growth in a menu of options, such as mutual funds. The investment options depend on your HSA provider, so it makes sense to shop around before setting up an HSA. Then, when you take distributions to pay for qualified medical expenses, your original contributions plus any earnings are entirely tax-free.


Contributions to an HSA can come from you or someone else, such as a family member or employer. Some company benefits include regular deposits into an HSA, similar to matching funds for a retirement plan. Any HSA contributions from an employer don’t get included in your taxable income, which is a fantastic benefit!


Depending on your income tax rate, using an HSA to pay for allowable healthcare expenses on a tax-free basis means getting about a 20% to 30% discount. Over your lifetime, that can add up to huge savings!


However, similar to a retirement account, you should never put money in an HSA that you might need for everyday expenses. Until you turn 65, you can only use HSA funds to pay for current or future qualified, unreimbursed medical expenses, or you’re subject to penalties. Pulling money from an HSA to spend on non-qualified expenses, such as groceries, clothes, or a vacation, means you must pay income tax plus an additional 20% penalty on withdrawn amounts.

What’s the difference between an HSA and an FSA?

Another popular medical savings account is a flexible spending account (FSA). However, it can only be offered by an employer and funded through payroll deductions on a pre-tax basis. An FSA has an annual use-it-or-lose-it policy, but with an HSA, there’s no deadline to spend your balance. Funds can stay in an HSA indefinitely, even if you change your insurance company, become uninsured, or are unemployed.


In short, don’t confuse these two accounts. They might sound similar, but they have some key differences. Individuals can open an HSA, and it permits tax-deductible contributions with no spending deadline. An FSA can only be offered in the workplace, and you must spend all or most of your balance every calendar year.

Who qualifies for an HSA?

I mentioned that you need a particular type of health insurance to qualify for an HSA. Only those with a high deductible health plan (HDHP) are eligible to open an HSA. As a reminder, the deductible is the amount you must pay out-of-pocket for covered medical expenses before your benefits begin each year.


While you might think it’s better to have a lower deductible and pay less out-of-pocket, having a higher deductible reduces your monthly insurance premiums. Deductibles and premiums have a seesaw relationship because increasing one makes the other go down.


No matter whether you get health insurance on your own or through work, find out if it’s an HSA-qualified plan so you can get all the medical savings possible!

More employers are offering HDHPs to help workers keep premiums as low as possible. No matter whether you get health insurance on your own or through work, find out if it’s an HSA-qualified plan so you can get all the medical savings possible!

The current IRS rule for HDHPs says the minimum annual deductible for in-network care is $1,400 and the maximum for the annual deductible and other out-of-pocket expenses is $7,000. That applies if you purchase health insurance just for yourself. And if you have a family plan, the minimum deductible is $2,800, and the maximum out-of-pocket is $14,000. The IRS allows HDHPs to offer preventive care with no deductible.


Having an HSA-eligible health plan means you could have high out-of-pocket costs. So, they’re not the right choice for everyone. In general, they’re excellent coverage when you’re in relatively good health and aren’t likely to spend the full deductible each year.


How much can you contribute to an HSA?

For 2021, you can contribute up to $3,600 to an HSA when you have an individual health plan or up to $7,200 with a family plan. If you’re over 55, you can contribute an additional $1,000 with either type.


For 2022, the HSA contribution limit for individual insurance increases slightly to $3,650, and the family plan cap goes up to $7,300. You can make tax-deductible contributions anytime during the year, even up to April 15 for the previous tax year. But you’re never required to make contributions to an HSA.

How can you use an HSA in retirement?

An often-forgotten benefit is that after age 65, you can spend HSA funds on non-qualified expenses without paying the 20% penalty. Be advised, though, that you’ll still have to pay income tax on those amounts.


That means an HSA turns into something similar to a traditional retirement account if you keep it long enough. That’s a great reason to max it out every year, even if you don’t expect many healthcare expenses. And it makes the account worth hanging onto even if you leave an HDHP and can no longer make contributions.

What are HSA-qualified medical expenses?

Once you’ve opened an HSA and have a balance, understanding how to spend it is critical. Qualified expenses include a wide range of health costs you might incur until you meet your annual deductible or that just aren’t covered by your health plan.

The IRS says for an expense to be HSA-qualified, it must pay for healthcare services, equipment, or medications. There are many covered expenses that you might not expect.


10 surprising HSA-qualified medical expenses

There are hundreds of potential HSA-qualified medical expenses, and you can see the complete list in IRS Publication 502, Medical and Dental Expenses. Here are ten qualified medical expenses that may surprise you:

1. Chiropractic care

All chiropractic care is HSA-qualified, even if your insurance plan doesn’t cover it. That means you can explore this alternative for pain relief before you go for medication or surgery.

2. Birth control

If your doctor prescribes your birth control pills, you can use your HSA to pay for them.

3. Eye surgery

Any costs you might have to pay out-of-pocket for surgery to correct your vision, such as LASIK or the removal of cataracts, can be paid for using HSA funds. And if your sight or hearing is impaired, you can also use it to purchase and care for a guide dog or other service animal.

4. Dental care

Going to the dentist is also covered for routine cleanings and the prevention of dental disease. You can use your HSA for services such as fluoride treatments, X-rays, fillings, extractions, dentures, and braces. Teeth whitening is not a qualified expense, nor is any cost or therapy that’s purely cosmetic. Although some might consider them primarily cosmetic, artificial teeth are an HSA-eligible expense.

5. Acupuncture

Even if your health insurance doesn’t cover acupuncture, you could use your HSA to pay for it tax-free.

6. Fertility enhancement

You can use an HSA to pay for any treatment to overcome an inability to have children, such as in vitro fertilization. Once you’re a parent, you can also spend it on breast pumps and supplies that assist lactation. Or you can use an HSA to go in the opposite direction and pay for sterilization or legal abortion.

7. Drug and alcohol addiction treatment

Any amount you pay for yourself or a family member to have inpatient treatment at a drug rehabilitation center, including meals and lodging, is HSA-qualified. You can also pay for transportation to and from Alcoholics Anonymous meetings in your community, assuming a medical provider has deemed AA attendance medically necessary for you.

8. Care from a psychologist or psychiatrist

You can use HSA funds for the costs to support yourself or a family member who you claim as a dependent through the treatment of a mental condition or illness. You can use HSA funds to pay for a patient’s treatment at a health institute if a physician prescribes treatment to alleviate a physical or mental disability or illness.

9. Home improvements

Any special equipment or improvements installed in a home to care for yourself or your dependent family members can be paid for with an HSA if their purpose is medical care. These might include constructing entrance ramps, widening doorways, installing lifts, or lowering cabinets and sinks. Another capital expense that’s HSA-qualified is removing lead-based paint in a home you own or rent.

10. Transportation and travel

Costs to get to and from any medical care, such as on a bus, taxi, train, plane, or ambulance, can be paid for with HSA money. This rule includes making regular visits to see an ill family member if visits get recommended as part of treatment (e.g., if you’re the parent of a sick child and need to visit them at their treatment facility). You can include lodging, but not meals when you travel to another city for medical purposes.


If you use your vehicle to get to medical services, you can use HSA money to cover certain out-of-pocket costs, including gas, oil, tolls, and parking fees. You can’t cover general vehicle maintenance or insurance costs, though.

It’s also worth noting that in March 2020, the CARES Act expanded eligible HSA expenses. Here are new products and services you can pay for using an HSA:

  • Menstrual care products, such as tampons, sanitary napkins, and menstrual cups.
  • Over-the-counter medications, such as cold and flu medicine, pain relievers, sleep aids, eye drops, and remedies for indigestion, acne, and motion sickness.
  • Telehealth services through the end of 2021.

Additionally, HDHPs can have a $0 deductible for telehealth services, just like for preventive care.

What are the tax benefits of using an HSA?

With an HSA, you get three tax benefits. That’s a significant advantage that doesn’t come with any other tax-advantaged account.

  1. If you’re eligible to contribute to an HSA, your contributions are tax-deductible up to your annual limit. For instance, if you’re over 55 and have family coverage, you could contribute up to $8,200 and cut your taxable income for 2021 by that amount.
  2. While your money is in an HSA, it grows tax-deferred. You don’t have to pay annual taxes on interest income or investment earnings in the account.
  3. Withdrawals from an HSA used for qualified healthcare expenses are entirely tax-free.

Are there more HSA advantages?

In addition to its terrific tax benefits, using an HSA gives you the following advantages:

  • Funds remain in the account from year to year for your entire life, with no penalty if you don’t spend them.
  • Funds can be used for you, your spouse, or your dependents for qualified, out-of-pocket medical expenses.
  • You own the account and decide how much to save or spend each year.
  • It’s portable, so if you change employers, switch health plans, or become unemployed, it’s yours to keep.
  • You can fund an HSA for the first time using the money you’ve already saved in an IRA by doing a tax-free rollover once in your lifetime, up to the annual contribution limit.

How do you open and fund an HSA?

If you qualify for an HSA, they’re available at many banks, credit unions, and financial institutions. They’re convenient to use and offer paper checks, debit cards, and online banking. You can use an HSA provider recommended by your employer, choose your own, or transfer funds to a different institution as you wish.


To quickly review the updated HSA rules, download my free HSA Cheat Sheet. This one-page guide summarizes what you need to know and some of the best places to open your HSA.


This article originally appeared on and was syndicated by

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8 retirement plan options for the self-employed


You can avoid costly retirement mistakes by picking the right retirement plan for yourself and your business.

As a self-employed freelance writer, I spent hours researching and learning about different self-employed retirement plans. When you’re self-employed or run a small business, these retirement savings plans are not an automatic benefit like an employer-sponsored 401(k) or pension plan that many employees receive as part of their job.

Thankfully, there are a number of self-employed retirement plan options, but each comes with its own benefits and limitations. Ultimately, I settled on a solo 401(k) for my business, but that doesn’t mean it’s the best fit for everyone.

Here’s everything you need to know about self-employed retirement plans and how to choose the right plan for you. We’ll talk through the plans one by one, and then give you some tips on how to open the retirement account of your choosing, so you can start putting aside some of your self-employment income to create a successful retirement scenario for yourself.

Related: 7 brilliant moves to thrive in an uncertain economy




An individual retirement account — IRA for short — is a type of retirement plan that anyone can use, including self-employed individuals. You can contribute to an IRA in addition to other self-employed retirement plans, and depending on your income and the type of account you choose, you may be able to take advantage of tax savings.

With a traditional IRA, you may be able to deduct your contributions when you file your tax return every year. Any earnings you receive will be taxed on a tax-deferred basis when you withdraw them in retirement. That means you’ll pay taxes on them according to your tax rate at the time of withdrawal.

In contrast, a Roth IRA doesn’t allow you to deduct contributions from your taxable income. You pay taxes on those contributions in the year you make them, and then when you take the money out in retirement, you receive it tax-free.

However, there are some limitations that can reduce the value of an IRA, depending on your situation:

  • In 2020, IRA contribution limits are set at a maximum of $6,000 or your taxable compensation for the year, whichever is less. If you’re age 50 or older, that limit goes up to $7,000.
  • Contributions made in excess of the annual limit will be taxed at 6% for each year they remain in the IRA.
  • Depending on your modified adjusted gross income on your tax return, you may not be able to contribute to a Roth IRA, or you may be subject to a lower contribution limit.
  • Your MAGI may also impact your ability to deduct contributions you make to a traditional IRA. IRA deduction limits can vary based on whether you also have an employer-sponsored retirement plan.
  • If you take withdrawals from an IRA before you reach age 59 1/2, you may have to pay taxes on the amount plus a 10% penalty for early withdrawals. There are, however, exceptions to this rule.

Because of the nature of IRAs, they can be a great way to supplement savings you’ve put into a self-employed retirement plan. However, because of their low annual contribution limit, they’re not the best option as a primary retirement plan.



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Also called a one-participant 401(k), a solo-k, a uni-k, or a one-participant k, a solo 401(k) is designed specifically for small business owners who have no employees (other than a spouse, if applicable).

In general, a solo 401(k) functions similarly to an employer-sponsored 401(k). You’ll make contributions with pre-tax dollars, and these contributions will grow tax-deferred until you take withdrawals in retirement.

There are, however, a few differences besides the single-participant nature. For starters, as the business owner, you can make contributions as yourself and also as the employer:

  • In 2020, you can make employee contributions of up to $19,500 as an individual; if you’re age 50 or older, you can add another $6,000 in catch-up contributions.
  • As the business owner, you can make employer contributions of up to 25% of your compensation annually, up to a maximum of $57,000 in 2020.

Those employer contributions can also be counted as a business expense, further reducing your tax liability each year. Depending on which plan provider you go through, solo 401(k)s are relatively inexpensive. For instance, I paid a few hundred dollars to set up mine plus an ongoing monthly fee of $25.

Unlike with an IRA, you may be able to set up a loan option with your solo 401(k), though interest charges will be involved. In addition, doing something like taking a 401(k) loan to pay off debt and borrowing from your own retirement should be considered only as a last resort.

All that said, here are some potential drawbacks of a solo 401(k) to consider:

  • As with IRAs, if you take withdrawals from a solo 401(k) account before you reach age 59 1/2, you’ll be assessed taxes plus a 10% penalty. Although there may be options to allow loans or hardship withdrawals, there are fewer exceptions to the 10% early withdrawal penalty than you’d get with an IRA.
  • You’re not eligible to open this plan if you employ anyone besides yourself and your spouse, though 1099 workers don’t count.
  • You may not be eligible if you’re also covered under an employer-sponsored retirement plan — for example, you work as an employee at a company and also run a side business in your spare time.

Because of how a solo 401(k) is set up, you might consider it if you’re an independent contractor or sole proprietor with no salaried employees — though, you can still qualify even if you employ your spouse.


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Simplified Employee Pension IRA is a type of IRA that you can establish to benefit you, your employees, or both. The primary difference between a SEP IRA and a traditional or Roth IRA is that only an employer can contribute to a SEP IRA.

The maximum contribution amount for each employee, including yourself, is the lesser of 25% of compensation or $57,000 in 2020. A SEP IRA functions similarly to a traditional IRA for tax purposes, which means your earnings will grow tax-deferred. Also, your contributions as the employer are tax-deductible.

If you want to make separate contributions to a traditional or Roth IRA, you can. In some cases, however, you may be permitted to make your personal IRA contributions to your SEP IRA.

Here are some potential issues you might run into with a SEP IRA:

  • A SEP IRA allows only employer contributions, unlike a solo 401(k), which allows you to contribute to your self-employed retirement plan as an individual and an employer.
  • If you have employees, you must contribute the same percentage of salary for each person who’s participating in the plan. That includes employees who are no longer employed on the last day of the year.
  • If you take a withdrawal before age 59 1/2, you’ll need to pay income tax and a 10% penalty on the distribution. There are, however, some exceptions to the 10% penalty requirement, which are the same as traditional and Roth IRA exceptions.
  • You can’t borrow from a SEP IRA as you can a solo 401(k).

A SEP IRA is for business owners who want the simplicity and lost cost of an IRA, but with a much higher contribution maximum. There’s also less paperwork involved than with a solo 401(k).


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A Savings Incentive Match Plan for Employees IRA allows both employers and employees to contribute to a traditional IRA. In 2020, you can contribute $13,500 as an individual or $16,500 if you’re age 50 or older. The same limit applies to any employees. As the employer, you can also choose to make a nonelective contribution of 2% of compensation or a matching contribution of up to 3% of compensation.

Because the SIMPLE IRA is designed as a traditional IRA, your contributions are tax deductible in the year you make them, and your earnings will grow tax-deferred. You can also contribute to a traditional or Roth IRA on your own.

Here are some important things to know about the SIMPLE IRA:

  • Although the structure of a SIMPLE IRA is similar to a solo 401(k), in that you can contribute as the employer and individual, its contribution limits are lower.
  • You can’t borrow from a SIMPLE IRA as you can a solo 401(k).
  • You may need to work with a special custodian to open a SIMPLE IRA account.
  • Withdrawals made before age 59 1/2 will be subject to income tax and a 10% penalty, though there are the same exceptions to the penalty as other IRA plans.

Consider a SIMPLE IRA if you want the chance to contribute as the business owner and an individual, but don’t expect to need the higher plan contribution limits of a solo 401(k). This self-employed retirement plan is also better if you have employees and don’t qualify for a solo 401(k).


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A Health Savings Account isn’t technically a retirement plan, but you can use one to set money aside to use in retirement. You can use this account in addition to one of the other self-employed retirement plans and a traditional or Roth IRA. In fact, I contribute to both a solo 401(k) and an HSA every year.

HSAs are available to taxpayers, including business owners, who have a high-deductible health plan. You can set aside money in the account to use for out-of-pocket medical expenses on a tax-free basis. In other words, your HSA contributions are tax-deductible, and you won’t pay any taxes when you make withdrawals for eligible medical expenses. If you take withdrawals for ineligible reasons, the amount will be subject to income taxes plus a 20% penalty.

That said, if you hold onto your HSA funds until you’re 65 or older, withdrawals for non-medical reasons will still be subject to income tax but not the additional 20% penalty. As a result, an HSA can function similarly to a tax-deferred retirement account. Of course, you can also use HSA funds to pay for health care costs in retirement and avoid all tax-related costs.

In 2020, you can contribute up to $3,550 to an HSA if you’re the only one on your health insurance plan, or up to $7,100 if you have a family plan. Depending on your HSA provider, you may be able to invest these funds.

If you’re considering an HSA, here are some things to keep in mind:

  • Because it’s not a traditional retirement plan, it’s not a good idea to rely solely on an HSA to save for your future.
  • You won’t qualify for an HSA if you don’t have a high-deductible health plan.
  • HSA contribution limits are lower than most other self-employed retirement plans.

If you qualify, consider an HSA as a way to supplement your other retirement contributions. Keep in mind, though, that any ongoing medical expenses may make it challenging to use the funds to save for retirement.


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Depending on your personal financial situation, you may also consider other types of small business retirement plans. Here are a few less-common options that self-employed people might consider.

Take some time to consider all of your options to determine which retirement plan is right for you. Also, consider consulting with a tax professional and/or financial advisor to get an idea of which plans would benefit you most when it comes to your tax planning.


A tax-deferred pension account, a Keogh plan allows you to set up a defined-benefit or defined-contribution plan. Keogh plans are relatively complicated and require more upkeep and costs than other types of self-employed retirement plans.


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With a Keogh plan or a separate defined-benefit plan, you’ll make contributions based on a set amount you aim to receive annually in retirement. There may be contribution limits, though, depending on how you plan to structure the plan.


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With this type of retirement plan, employees get a share in the profits of the business. There are no contributions from the employee with this type of plan, and contributions by the business will depend on quarterly or annual earnings.


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In most cases, you can get any of these self-employed retirement plans from a major brokerage firm. In some cases, some brokers may not offer certain types of plans, so decide which plan you want to go with before you start shopping around.

As you compare brokers and their self-employed retirement plans, review several features, including:

  • Cost (setup and ongoing fees)
  • Ease of use and access
  • Administrative help
  • Investment options (mutual fundsETFs, etc.)
  • Resources and advice

There’s no single best investment broker for everyone, so it’s important to take your time and consider how to choose a brokerage that’s best for you and your business.


Self-employment comes with a lot of perks. But without an employer-sponsored retirement plan, you’re responsible for making sure you have everything in place to save for your future. Saving for retirement sooner rather than later is important because it gives you more options when you’re ready to slow down or stop working entirely.

Think about your financial goals, ability to save and tax situation to help you determine which retirement plan is the best option for you. Also, think about the costs, upkeep, and potential pitfalls associated with each plan. The retirement planning process can take some time, but getting the right account set up could make it easier to avoid costly retirement mistakes in the long run.

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This article originally appeared on and was syndicated by


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