Healthcare is expensive, and as a firefighter, your retirement could be at risk—not just from the physical demands of your profession but also from the financial challenges it brings. You might be thinking, “That’s why I have Medicare and health insurance, right?” Yes, but those won’t cover all the costs you’re likely to face in retirement. Fortunately, there are several ways to mitigate the threats to your retirement savings.
In this article, we’ll explore the Health Savings Account (HSA), a tax-advantaged account available to many firefighters. This account is designed to help you pay for healthcare costs with the benefit of tax advantages and potential investment growth.
What is the HSA?
The HSA is similar to a retirement account, such as an IRA or 401(K). You deposit funds into the account and, from there, purchase investments such as ETFs and mutual funds and hope that they grow in value. However, that’s about where the similarities end. First, there are tax deductions; any deposits you make can be deducted from your taxable income for the year, with a limit of $4,150 if you have health coverage just for yourself or $8,300 if you have coverage for your family. Keep in mind those limits are subject to change.
Your funds grow tax-free, and when you need to pay for a qualified medical expense, you can sell investments, withdraw the necessary amount, and cover the expense without incurring taxes.
And that right there is what makes the HSA so powerful: you get tax deductions, tax-free growth, and tax-free withdrawals. There are also no Required Minimum Withdrawals, so you can let your funds grow as long as you’d like.
Okay, so what’s the catch? Because, of course, there is one, right? You can only open a Health Savings Account if you have a High-Deductible Health Plan. As opposed to a Traditional Health Plan, an HDHP has higher deductibles with lower premiums and higher out-of-pocket maximums. It’s good for those who are generally healthy and don’t anticipate frequent medical expenses.
| Benefit | Traditional Health Plan | High-Deductible Health Plan (HDHP) |
|---|---|---|
| Premium Costs | Higher | Lower |
| Deductibles | Lower | Higher |
| Out-of-Pocket Maximums | Lower | Higher |
| Eligibility for HSA | No | Yes |
| Best For | Frequent healthcare users | Generally healthy individuals |
| Tax Benefits (via HSA) | None | Yes, triple tax advantage |
The Power of the Health Savings Account
Let’s consider an example where a firefighter contributes the maximum amount of $4,150 to their HSA every year for 20 years. Assuming a 10% annual growth rate on these investments and without making any additional contributions after the initial 20 years, here’s how the scenario plays out:
- Total Contributions Over 20 Years: $83,000 (contributing $4,150 annually for 20 years)
- Total Tax Deduction Over 20 Years: $18,260 (assuming a marginal tax rate of 22%)
- Value of the HSA After 20 Years of Contributions and 10 Years of Growth: Approximately $678,160.87
In this example, we make some assumptions to simplify things. In reality, the maximum contribution amount would increase every once in a while, and your tax rate would likely change as well. The biggest assumption of all is that we assume a consistent 10% rate of return. Investing is never guaranteed, so you should only invest at your own risk.
With that in mind, time is your greatest ally when it comes to investing—the earlier you start, the better. As you age, you may face medical expenses not covered by Medicare, such as long-term care. An HSA can be a tax-efficient way to cover these expenses without tapping into your general retirement savings or pension.
However, an HSA isn’t just for future expenses. It can also be useful for more immediate needs, though timing becomes trickier due to potential market downturns. For instance, if you anticipate a significant medical expense in the next few years, you could use your HSA to help cover it. However, in a short timeframe, your investments may not grow significantly—or they could even lose value—leaving you worse off than if you had simply saved the money.
Additionally, you’re not required to invest your HSA funds. You can use it as a straightforward savings vehicle to gain the tax deduction, or you could invest in lower-risk options, such as bonds, to prepare for near-term medical expenses.
Can I Use HSA Funds for Non-Medical Expenses?
If you decide to withdraw funds for non-medical purposes before age 65, you’ll face both income taxes and a 20% penalty. After 65, the penalty disappears, but the withdrawn amount is still subject to income tax—making it less beneficial than using it for healthcare costs.
What Happens to Your HSA If You Change Jobs?
Your HSA is yours to keep, even if you change jobs. The account stays with you, and you can continue using the funds for qualified medical expenses. If your new job offers a High-Deductible Health Plan (HDHP), you can keep contributing to the same HSA. If not, you can still use the existing funds but won’t be able to make new contributions unless you switch to an HDHP.
Can You Use Your HSA to Pay for Insurance Premiums?
Generally, HSA funds cannot be used to pay for health insurance premiums. However, there are a few exceptions: you can use your HSA to pay for COBRA coverage, long-term care insurance, health coverage while receiving unemployment benefits, and Medicare premiums (excluding Medigap).
Can You Keep Contributing to an HSA After Age 65?
No, once you enroll in Medicare (typically at age 65), you can no longer contribute to your HSA. However, the funds in your account can still be used for eligible medical expenses tax-free.
In Conclusion
As a firefighter, your retirement planning needs to account for more than just the physical demands of your profession. It’s also necessary to address the financial challenges that come with ever-rising healthcare costs. The Health Savings Account (HSA) is a powerful tool that can help you manage these expenses while providing valuable tax benefits and investment growth potential.
However, it’s not the only tool out there, and you may not even qualify for it. Additionally, there are alternative methods to prepare for healthcare expenses, and we’d be happy to compare and contrast what is available to you and help you determine which is best for your personal situation. Just click the button below!
