Using Your HSA As A Retirement Account
Posted on December 6, 2011 by Admin
As the price of insurance continues to increase, health savings accounts (or HSA’s) are becoming more and more popular. An HSA works by combining a savings account with a high deductible insurance plan, which means you will have a higher deductible (out of pocket cost) for health insurance coverage.
The main benefit of an HSA is that the money you put into the account is pre-tax, meaning you don’t pay tax on it. It’s the same concept behind the 401(k). So, if you are having money taken out of your paycheck to fund your HSA, the money will come out before taxes. On the other hand, if you are funding your HSA with money not from your paycheck, the money you contribute will be accounted for on your taxes for the year, reducing your taxable income.
An even better benefit is if you use the money in your HSA for medical expenses, the money taken out is tax free as well. Therefore, you can put money in pre-tax and avoid tax on the back end when it is used for medical expenses. Here is a list of eligible HSA expenses. Here is a list of eligible HSA expenses.
Of course, there are limits to how much you can put into your HSA each year. Currently for 2011 it is $3,050 for individuals and $6,150 for families. If you are 55 and older, you can add $1,000 to each of those figures. For 2012, individuals can contribute $3,100 and families can contribute $6,200. Those 55 and older can still contribute an additional $1,000 to those numbers.
When I first started with my HSA, I used the money I was saving in my HSA for medical expenses, taking advantage of the tax free money. But then I got to thinking about how to better use my HSA. After doing some research, I realized that many others were doing exactly what I was thinking.
Instead of putting money into my HSA each month and then using it on medical expenses now, why not put the money into my HSA and not use it. Instead, I would use out of pocket money to pay for my medical expenses. The benefit of this was simple: I invest my money now pre-tax and let it grow (HSA’s allow for you to invest the money in your account) over the next 40 years. When I retire and have more health related expenses, I can use the money I saved on those medical bills and it will be tax free! Basically, it will work like a Roth IRA for me. I invest pre-tax, let the money grow over the course of 35-40 years, then withdraw it tax-free.
Some of you will point out that we don’t know what the future holds and the tax free nature of distributions from HSA accounts could be changed. I agree with that. But, the change will never be implemented over night. There will be a window where you can still use your HSA money tax free. Additionally, even if taxes are introduced, if you hold off until retirement to use the money, ideally you will be in a lower tax bracket, off-setting some of the tax you would pay.
The HSA is a great tool for saving on healthcare expenses or acting like a retirement account for you. I highly recommend looking into it to see how you may benefit from it.
About the Author: Don has worked in the investment industry for over 10 years helping individuals, friends, and family members dig out of debt, invest, and better understand personal finance. As a result, he began blogging at MoneySmartGuides to help others gain a better perspective on personal finance in hopes of helping more people with the issues they face with their money.
