How You Can Utilize an HSA Now to Save For Retirement

By Sarah Brenner, IRA Technical Expert
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You may be familiar with Health Savings Accounts (HSAs). You probably know that these tax-advantaged accounts can be used to pay for medical expenses. However, you may not be aware that these accounts can be valuable retirement savings tools.

There is no requirement that you have earned income in order to contribute to an HSA, as there is with most retirement plans. There are also no income limits. No one makes too much money to be eligible to contribute. Contributions are always fully deductible. Contributing to an IRA or company plan has no impact on your ability to make HSA contributions. You may contribute to your own HSA, without the involvement of your employer, or your employer may make contributions to an HSA on your behalf. However, to contribute to an HSA, you must have a high deductible health plan (HDHP). If you are an employee, and not sure if your plan qualifies, check with your human resources department or your insurance company.

If you own your own business, consider switching to a HDHP. You can have lower premiums and the ability to make HSA contributions. The amount you may contribute depends on your age and the type of health insurance coverage that you have. For example, if you are under age 55 and have self only HDHP coverage, you may contribute up to $3,350 for 2015. If you are age 55 or older and have family HDHP coverage, you may contribute $7,650 for 2015.

Any distributions taken from an HSA to pay for qualified medical expenses are tax-and-penalty-free. Generally, qualified medical expenses are those that qualify for the medical expense deduction. This includes most medical, dental, vision and chiropractic expenses. You may take tax-and penalty-free distributions to pay for your spouse or children’s medical expenses as well as your own. An HSA owner can take a tax-and penalty-free distribution in 2015 to pay for medical expenses in a previous year, as long as the expenses were incurred after the HSA was established.

A critical part of saving for retirement is saving for medical expenses. Many experts estimate that a large percentage of many retirees’ savings will go to healthcare costs. If you fund an HSA yearly now and you do not use the funds for current medical expenses, you can accumulate a significant amount that can help defray these costs. When you are enrolled in Medicare, you can no longer make HSA contributions, but you are not required to liquidate your HSA. You may still continue to take tax-and penalty-free distributions for medical costs. You can even take tax-and penalty-free distributions for Medicare premiums and out-of-pocket expenses, or for your share of premiums for employer-based coverage. If you do not use the funds in your HSA for medical expenses, when you reach age 65, you may use them for any other purpose without penalty.

An HSA offers the tax benefits of both the traditional IRA and the Roth IRA. With an HSA, you can have both deductible contributions and tax-free earnings if distributions are used for qualified medical expenses. When you are age 65 or older, HSA distributions not used for medical expenses are taxable, but not subject to penalty. This is how your traditional IRA distributions will be treated for tax purposes in retirement. If you do not need the funds, an HSA offers flexibility. You are not required to take required minimum distributions (RMDs) from an HSA during your lifetime, as you are with a traditional IRA.

Saving for a secure retirement is challenging. Why not use all the tools available? If eligible, consider an HSA in addition to your IRA and company plan. If your income is too high to contribute to a Roth IRA or deduct your traditional IRA contributions, consider an HSA instead for similar benefits.
 

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