Saving for retirement? While most people rely almost entirely on their 401k as their investment of choice there a few other well-known options available. To supplement their 401k people choose from a Traditional IRA, Roth IRA or taxable accounts. In these accounts you could potentially own individual stocks or bonds, CD’s, mutual funds, exchange traded funds, money markets, savings accounts.
Health Savings Accounts are my favorite retirement planning vehicle. Every year I make sure to fully fund my family’s account before anything else. The benefits of a Health Savings Account (HSA) are one-of-a-kind. I hope to have a six figure balance by the age of 65. Use this HSA future value calculator to do your own calculation. These accounts have really caught on. Total HSA assets have skyrocketed by 2,200%, climbing to $37 billion last year from $1.7 billion in 2006, according to the Devenir Group consulting firm. By 2018, HSA assets are projected to pass $53 billion, the firm says.
The contributions you make to the account are fully federal tax-deductible. Unlike a Traditional IRA or Roth IRA there are no income limitations on contributors. We can all use the current tax write-off. Any growth of the money while it is in the account is tax-deferred (not taxed). This is also true with either type of IRA. What really stands out about a HSA is that if/when you take money out of your account income tax-free for IRS approved medical expenses. These include dentist, doctor, or hospital charges. It also includes insurance premiums including Medicare and long-term care insurance premiums.
Qualified withdrawals from HSA Accounts are Tax-Free
How much can you contribute? In 2017, individuals can contribute up to $3,400 and $6,750 for couples. People over age 55 and contribute an additional $1,000. The money you contribute can be left to grow over time, it’s not use it lose it. Whatever you don’t spend stays in your account. When I have medical expenses I choose to leave this account alone to grow and pay for medical expenses from other savings. Withdrawals for non-qualified reasons are taxed and have 20% penalty. This is no penalty for distributions after age 65, but they are subject to income tax if not used for qualified medical expenses.
Who Can Use HSA’s? Not everybody is eligible to fund a Health Saving Account. In order to be eligible to open and fund a HSA your medical insurance plan has to be a qualified High Deductible Health Plan (HDHP). These plans come with a minimum of a $1,300 deductible for individuals and $2,600 for families. A HDHP’s total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) can’t be more than $6,550 for an individual or $13,100 for a family. (This limit doesn’t apply to out-of-network services.) Check with your employer to see if they offer a qualified plan or if you have an individual plan you can access a HDHP.
What about the burden of having a high medical insurance deductible?
Insurance 101 would describe insurance as a transfer of risk and if possible it makes sense to self-insure (high deductible) for large expenses that are unlikely to be incurred. In the case of medical insurance moving to a higher deductible can save you a pretty penny in monthly premium. For example, if you move from a $500 deductible to a $5,000 family deductible, you may very well save $400/month on your premium. If you banked the premium savings (tax-deductible) in your health savings account, you would have plenty of money to pay should you have a large claim. In this example, you are simply redirecting money from your insurance premium to your HSA deposit. I suggest you set up your HSA deposit to be automatically taken from your checking account each month.
How does the money grow in a Health Saving Account?
Basic HSA’s are just like interest bearing checking accounts. They are generally held at a bank and come with a check book and a debit card. With some HSA accounts you have the option to move your money into a brokerage account. HSA Bank offer its health savings account customers the ability to open an account with TD Ameritrade. Therefore, you can buy and sell investments within your HSA.
In summary, a Health Savings Account could be called a SUPER IRA. Tax-deductible contributions, tax-deferred growth and tax-free distributions (qualified expenses). It doesn’t get any better than that.
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