Chances are, Social Security plays an important role in your retirement. After all, millions of older people collect it today.
But you might be unpleasantly surprised to learn that Social Security currently only pays an average monthly benefit of $ 1,543. Now, if you have a higher income, your benefit may be higher. And the age you reach to claim benefits could also change that number for the better.
But for the most part, Social Security doesn’t pay older people enough money to live on. Retirees who have only Social Security as a source of income often find it difficult to manage their bills, especially since the annual increases to the program have been less than generous in recent years.
Image source: Getty Images.
This is why it is so important to supplement your benefits. And there is an account that can help you do just that.
Fund an HSA
Many people supplement their Social Security income with withdrawals from a retirement savings plan, such as a 401 (k) or IRA. But here’s another option to consider – a health savings account, or HSA.
The advantage of funding a 401 (k) or an IRA is the tax benefits involved. Traditional 401 (k) and IRAs allow you to deposit money on a pre-tax basis, while Roth 401 (k) and IRAs give you tax-free gains on your account and withdrawals on a tax-free basis. tax free.
The beauty of HSAs is that they come with all three tax benefits. Contributions are tax-free, investment gains in your account are tax-free, and withdrawals are tax-free as long as they are used to cover qualifying medical expenses.
Now, let’s talk about this aspect for a second. HSAs are more limiting than 401 (k) and IRAs because they are meant to be used only for health care expenses.
But here’s the problem: Once you retire, medical care might, in fact, become your biggest recurring expense. This is true whether or not you have any health issues, and therefore funding an HSA is a low risk prospect, as there is a good chance that you will use that money during your retirement at some point.
Of course, the only catch with HSAs is that you can only contribute to them if you are enrolled in a high deductible health insurance plan, the definition of which may change from year to year. But if you qualify based on your insurance plan, it pays to put money in an HSA while you can. This way, you will have a dedicated source of income to pay for your healthcare costs down the line.
Another great feature of HSAs is that they allow you to make withdrawals for any reason from age 65 without penalty. If you withdraw HSA funds for non-medical purposes, you will be taxed on your withdrawals – but the same goes for a traditional 401 (k) or IRA withdrawal. And that way, you get additional tax benefits.
While Social Security may end up being your primary source of retirement income, it shouldn’t be your only source. It’s worth seeing if you qualify to contribute money to an HSA. This could not only put more money in your pocket as a senior, but also make a very expensive expense much more manageable.
