A couple of years ago, I started my first Health Savings Account (HSA). I love it because it allows me to save on monthly premiums by having a high deductible plan and at the same time, I can save money tax-free to pay for qualified medical expenses. When my daughter had to have a heart procedure done at the age of 9 months, it was a relief to know that we had money in our HSA account to help meet our high deductible. In my case, it has been a great emergency fund; however, I am excited to get to the point some day of using the other incredible features a Health Savings Account offers.
We often talk about retirement savings vehicles such as IRAs and 401(k)s. HSAs are another very advantageous savings vehicle that is often overlooked because it is not considered a retirement account. If you are covered under a high deductible health insurance plan, you may be eligible to contribute to an HSA. For 2015, individuals may be able to contribute up to $3,350 and families up to $6,650. Your employer may allow you to deduct your contributions pre-tax from your paycheck or you can contribute to your HSA yourself and file for the deduction on your tax return. The benefit of the HSA is that distributions for qualified medical expenses are tax-free.
How does this help you with saving for retirement? Well, what if you do not need to take out money from the HSA to pay for your healthcare expenses each year? The HSA is not like a flexible spending account that must be used by the end of each year or you will lost it. The balance in an HSA rolls over each year and can continue to grow. There are many financial institutions that offer HSA accounts and some allow you to invest these accounts as you would an IRA or 401(k). However, keep in mind that your employer may dictate where you have to open your account.
If you take distributions from the HSA for anything other than qualified medical expenses, you could be charged an additional 20% penalty by the IRS. However, after age 65, this penalty does not apply and you can use the account like an IRA. For example, you could use your HSA for various retirement and medical expenses, including long-term care premiums and Medicare premiums. This is the other feature of Health Savings Accounts that make them very appealing as both medical and retirement savings vehicles.
Since there are many IRS rules relating to HSAs, it is important to consult with your tax advisor and your financial planner to determine if an HSA is a good savings vehicle for you. To learn more about HSAs, click here for the IRS Publication 969.
Kim Butler, CFP®
Associate Financial Planner