With all this talk about shutting down foreign tax havens and those “unpatriotic” corporate tax inversions, its nice to read something creative, practical and personally beneficial to all of us that are trying to build value and hang onto as much money as possible for our future retirement.
So, what if you could fund a retirement account specifically earmarked for health care costs?
In theory, good savers could accumulate up to $360,000 after saving in an HSA for 40 years, assuming a 2.5 percent return, according to a study by the Employee Benefit Research Institute, or EBRI. A 7.5 percent rate of return nearly triples that figure to $1.1 million.
- Money goes in pretax or contributions are tax deductible.
- Once in the account, money grows tax-free.
- Money can be withdrawn tax-free to cover qualified medical expenses.
The buildup is tax-free, so whatever earnings you get on the account — whether it’s interest earnings or if you invest the money in stocks or mutual funds or some type of brokerage account — that builds up tax-free and when money comes out for qualified medical expenses, it’s tax-free,” says Paul Fronstin, Ph.D., director of the health research and education program at EBRI. “It’s different than a traditional 401(k) plan where the money goes in tax-free, builds up tax-free but is taxable upon distribution,” he says.
HSAs actually surpass IRAs — even Roth IRAs — in their tax blessings. They have a triple tax advantage compared with the measly two tax benefits offered by individual retirement accounts. There are just a couple of cons.
- To even qualify for an HSA, you must purchase a high-deductible health plan. These are not “Cadillac” health care plans with generous benefits. The minimum annual deductible, according to the IRS, is $1,250 for individuals and $2,500 for family coverage.
- The money must be earmarked strictly for medical expenses or penalties may be imposed. Withdrawals used for nonqualified medical expenses before someone becomes eligible for Medicare are subject to both income taxes and a 20 percent penalty.
(After age 65 or Medicare eligibility, withdrawals for nonmedical expenses are not subject to the 20 percent penalty, though they are subject to income taxes, just as they would be from a traditional IRA.)
- Contributions to the account can only be made up until an individual hits Medicare eligibility. Turning 65 doesn’t automatically disqualify you from contributing to an HSA, but enrolling in Medicare as the primary source of insurance does.
- HSAs are also a bit hamstrung by low contribution levels. The contribution limit in 2014 is $3,300 for an individual and $6,550 for family coverage. People over age 55 can put in an extra $1,000 per year in catch-up contributions.
As Sheyna so succinctly puts it in her original article, “You’re going to be paying for health care anyway. Tax-free money might make the mountain of health care expenses waiting in retirement a little more easily scaled.”