Early posting this week as I will be traveling for the 4th of July weekend. Happy Independence Day!
In my previous post A Simple Step-wise Approach to Retirement Savings, I mentioned Health Savings Accounts (HSA) in Step 4. Unfortunately it seems that despite its advantages, the HSA remains less well known than other tax-advantaged investment vehicles. Let's take a look:
What is the HSA?
A Health Savings Account (HSA) is a tax-advantaged medical savings plan for those enrolled in a High Deductible Health Plan (HDHP) - health plans that has a higher-than-traditional deductible. (As of 2015, the minimum deductible for an HDHP is $1,300 for singles and $2,600 for families). An HSA allows you to put money away into a savings account specifically earmarked for healthcare expenses. But wait, that's not all...
What are the benefits?
- You can put money into an HSA tax-free, like a traditional IRA.
- You can withdraw money from an HSA at anytime tax-free, if used for medical expenses, like a ROTH IRA. If you withdraw from an HSA for non-medical expenses prior to age 65, you will be subjected to a 20% penalty, similar to the 10% penalty when you withdraw early from an IRA.
- When you hit age 65, the 20% penalty goes away, but any withdrawals for non-medical expenses will be taxed as ordinary income, like a traditional IRA.
- Unlike a Flexible Spending Account (FSA), any unused money in an HSA is NOT lost at the end of the year.
- You can invest the money in an HSA, like a 401(k) plan.
- Currently the contribution limit to an HSA plan is $3,350/individual or $6,750/family per year.
- If you are over age 55, you can contribute an additional $1,000 a year as catchup contribution.
Putting it all together.
Let me demonstrate why the HSA is not only the secret retirement plan that many ignore, but also may be the best.
- You invest money into your HSA every year, TAX-FREE.
- You manage your HSA funds like you would a 401(k) or IRA.
- You pay for your medical expenses out of pocket, saving all your receipts.
- You watch your HSA investments grow until you're 65, TAX-FREE.
- You withdraw from your HSA account. This is where all those medical expense receipts come into play - remember that any qualified medical expense can be withdrawn from the HSA TAX-FREE!
- Any amount over your receipt total can be withdrawn without a penalty, although subjected to ordinary income taxes, like a traditional 401(k).
Do you qualify for a HDHP? If so, it may be time to look at HSAs.