An HSA combines the best features of all the various tax-advantaged retirement accounts available. If used correctly, money goes in tax-free, grows tax-free, and comes out tax-free. Sound too good to be true? Read on to find out how it can be done and how you might qualify for one.
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Who is eligible for an HSA?
In order to qualify for an HSA, you must have a high-deductible health plan (HDHP). For 2017, your annual health insurance deductible must be at least $1,300 for single coverage (with an out-of-pocket maximum of $6,550) or $2,600 for family coverage (with an out-of-pocket maximum of $13,100). In addition, you cannot be covered by another type of health insurance plan, be on Medicare, or be claimed as a dependent on someone's tax return.
What is an HSA account?
A health savings account is a triple-tax-advantaged account that allows individuals to save for current and future healthcare costs. You can open an HSA account through a bank, an insurance company, or another IRS-approved trustee.
For 2017, you can contribute $3,400 to an HSA if you have a high-deductible individual health insurance plan or $6,750 if you have a family plan. And individuals 55 or older can contribute an extra $1,000. Contributions are deductible from taxable income, the money grows tax-deferred, and the distributions are tax-free -- as long as they are used for qualified healthcare expenses. Individuals can also make a one-time transfer from an IRA to fund an HSA.
According to the IRS, a high-deductible health insurance plan may cover some preventive care without a deductible. Otherwise, an individual can use the funds in an HSA to cover prescription drugs and other medical expenses. For a better understanding of what qualifies as a medical benefit, and for a list of examples of what is considered a qualified medical expense, see IRS Publication 502.
Finally, if you withdraw funds from an HSA for non-medical expenses, you will owe income tax and pay a 20% penalty. But once you turn 65, an HSA mimics a traditional 401(k) or IRA: You can withdraw funds for any purpose, and you'll only owe income taxes.
How to use an HSA as part of your retirement strategy
Choosing a health insurance plan for you and your family is a serious financial decision. Among other things, you must consider the health of you and your family, along with your available resources and ability to pay for medical care. If you're eligible for an HSA and can afford to pay for all or most of your increased out-of-pocket medical bills now, including meeting the higher deductible, then saving in an HSA for your retirement might make sense.
An HSA account is similar to other retirement accounts in that the account is portable and moves with you, the funds roll over from year to year, and you can invest the money in the account for the long term. Even if you use some of the funds during the year and are able to save only a portion of your yearly contribution, you can invest the balance, making this another opportunity to save for your retirement years.
According to a recent study by Fidelity, a couple in retirement today may need $260,000 to cover healthcare costs -- that's in addition to other living expenses. As we plan for retirement, we must continually look for new vehicles to help us achieve our goals using the most effective and tax-efficient methods available to us. And saving in an HSA can be a smart option.
