A Health Savings Account (HSA) is a tax advantaged account that you can put money into to pay for future medical costs. The money you place in the account is tax-deductible and grows tax-free if you use it for qualified medical expenses. Although many just place a minimum amount into the account for medical expenses, you may want to consider using them as a supplemental retirement savings vehicle.
How Do I Get a HSA?
In order to open a HSA, you must have a high deductible health plan (HDHP), not be eligible for Medicare (be age 65), and not be claimed on someone else’s tax return. A HDHP is a health insurance plan that has at least a $1,150 deductible for individuals or a $2,300 deductible for families. Also, the annual out-of-pocket maximums generally cannot exceed $5,800 for individuals or $11,600 for families. These plans are generally less expensive than more comprehensive plans offered by employers. Actually, many employers are beginning to offer HDHPs in their benefits package in order to cut health care expenses. HDHPs are typically the best choice for individuals who are in good health and do not typically have many out-of-pocket expenses throughout the year. Find an HSA plan that’s right for you (affiliate link).
What Can a HSA Be Used For and How Much Can I Put In It?
As stated earlier, a HSA can be completely tax-free if you use the money for qualified medical expenses. So what are these expenses? These expenses include general medical care, dental and vision care, prescriptions, and over-the-counter items such as aspirin. One thing that is not included on this list is insurance premiums. Premiums are not a qualified medical expense according to the tax law. However, Medicare premiums are deemed qualified and will be discussed in a later section. For 2009 you can place up to $3,000 in a HSA if you have individual coverage or up to $5,950 if you have family coverage. If you are age 55 or older you can place an additional $1,000 into the account.
Why Should I Use a HSA For Retirement Medical Expenses?
Fidelity estimates that a couple will need approximately $225,000 to cover their health care costs if they retire in 2009. That is an extremely high amount that will slowly deplete your retirement accounts. So why not use a HSA to fund this need? As mention earlier, you do not qualify to have a HSA if you are currently on Medicare. However, if you have a HSA prior to age 65 and then become eligible for Medicare, you can still keep the account open and use it for medical expenses although you are no longer able to fund the account. HSA money can be used to pay for Medicare premiums and out-of-pocket expenses including deductibles, co-pays and coinsurance for Part A, B, C or D.
If you remember from earlier, you get a deduction for your contribution to a HSA so you are ultimately placing pre-tax money in your HSA. That money then grows tax-free as long as you use it for qualified medical expenses. So if you save for this portion of your retirement expenses in a HSA, you will be using untaxed money which is always a good thing. If you were to use money from your 401(k) to fund this goal, you would be paying some taxes. As you may already know, money placed into a 401(k) is pre-tax but when you take it out in retirement, you are taxed at your ordinary income tax rate. Some of you may be saying that a Roth IRA would be better. A Roth IRA grows tax-free until retirement just like a HSA. However, a Roth IRA is funded with after-tax dollars where a HSA is pre-tax money. As you can see, as long as the money is used for qualified medical expenses, a HSA combines the tax benefits of a 401(k) with the tax benefits of a Roth IRA. That is one combination that cannot be beat! The fact that there are no tax ramifications means that you can save less to fund this goal than if you were to save for it in a different retirement vehicle.