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How an HSA Can Help Remedy a Retirement Savings Deficiency

how-hsa-remedy-retirement-savings-deficiency-bodyWith all the investments you're making to establish and maintain a thriving business, it can be easy for retirement savings to fall down on the list. If your retirement savings are a little weak or sickly, you can correct that retirement savings deficiency by using a cash balance plan and a health savings account (HSA), which help you aggressively build retirement savings while trimming your tax bill.

Use a cash balance plan for increased pre-tax contributions

If you already offer an employee 401(k) at your business, a cash balance plan may be the perfect addition to help you strengthen your retirement account balances while lowering your tax burden. As a business owner, you can set up a cash balance plan and make additional pre-tax contributions on top of your 401(k) contributions every year.

A cash balance plan is a defined benefit plan, resembling a pension. Unlike a traditional pension, which pays recipients a monthly income stream, a cash balance plan states the amount it will pay in retirement as a total sum or account balance. Benefits are portable, allowing account owners to roll over the balance to an individual retirement account (IRA) or another employer retirement plan.

Cash balance plans have high contribution limits that increase with your age. At age 30, you can contribute a healthy yearly maximum of $51,000, but that increases to a maximum of $329,000 at age 70! These contributions are separate from and in addition to your chosen 401(k) contributions. Not only do these high cash balance limits shape up your retirement balances quickly, but since contributions cut your adjusted gross income, you realize even more savings through lower taxes.

Build a fund for future expenses

Another vehicle for tax-free retirement savings is the HSA. If you have a qualified high-deductible medical plan, you’re able to open and contribute to a health savings account. Here’s how it works:

  • You set aside pre-tax money in the HSA, up to a yearly maximum of $3,450 for yourself alone or $6,900 for a family. The government raises this limit a bit each year to keep pace with inflation.

  • You pay no tax on HSA money spent on IRS-qualified medical expenses. You’ll want to avoid paying anything other than qualified medical expenses with HSA funds, because those expenditures will be subject to a 20% penalty fee.

  • HSA funds may be invested in traditional equities, such as stocks and bonds, to gain higher yields. Growth on invested funds is not taxed.

  • Fund balances roll over year to year and remain in your possession, even if you switch to another type of medical plan that does not allow further HSA contributions.

With its pre-tax contributions and tax-free account growth, the HSA provides a powerful tax shelter. If you contribute every year, invest your money in equities, and leave your account largely untouched before retirement, you’ll amass a large, tax-free fund to use for costly medical expenses in retirement and old age. Also, at age 65, you’ll pay only regular income tax (likely at a reduced rate, depending on your business exit plans) on withdrawals, regardless of how you spend the money.

Though it can be difficult to balance saving for retirement with investing in your business, a comfortable retirement is a goal you deserve to realize. Learn more about balancing business and personal finance decisions in our ebook.


Member SIPC & FINRA. Advisory services offered through SWBC Investment Company, a Registered Investment Advisor.

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