Wednesday, April 12, 2017

Saving for Retirement with a Health Savings Account

Health Savings Accounts, or an HSA, are quickly becoming more and more popular in the United States. Not only are they a useful vehicle for saving for health care costs and expenses, but they can be a valuable tool for retirement savings as well. 

If you have a high-deductible insurance plan, you are eligible for an HSA account. Many plans and companies offer an HSA account to accompany your insurance, or you may open your own account at a financial institution. 

Health Savings accounts can be rolled over year after year and the money in your account can be invested. Often, Health Savings Accounts are often confused with Flexible Savings Accounts, which do not roll over each year.

An HSA is a great way to get and use the tax-free money for medical expenses that you may incur over your lifetime. Health Savings Accounts save you money on taxes in three different ways:

  1. Your money goes into your account before it is taxed and is not counted toward your taxable income. 
  2. You can invest the money in your Health Savings Account and it grows tax deferred. Any interest, dividends, or capital gains you earn are not taxed, as long as they are spent on medical expenses. 
  3. When you withdraw the funds for qualified medical purposes, they are withdrawn tax-free as well - which includes all deductible and health care costs that are not covered by your insurance plan. 

Tax Implications

Since Health Savings Accounts can be rolled over year after year and the money within the account can be invested, it is another great way to save money for retirement. 

Once you turn sixty-five, the money in your health savings account can be withdrawn without a tax penalty and can be spent on non-medical expenses. The money is taxed as income, like with a traditional IRA, but there are no other tax penalties associated with using the money for things other than medical expenses. 

However, once you turn sixty-five, you are no longer able to contribute to your account, so be sure to start saving early. Saving early will help give you a good nest egg for any medical issues that may arise at any time in your life and prevent you from having to make or use a bad credit loan.

Limits and Deductibles

There are limits on who can contribute to a health savings account. You cannot be enrolled in Medicare or claimed as a dependent by another person. Your health insurance plan also must qualify as a high deductible plan. 

The qualifications for that may change, but currently, your deductible must at least $1300 for an individual and $2600 for families. The amount of money that can be placed into an account is also variable between individuals and age. 

For those under the age of fifty-five, you currently can place up to $3400 into an account per year for an individual and as much as $6750 for families in 2017. If you are over the age of fifty-five, you may add an additional one thousand dollars per year into the account as a catch-up contribution until the age of sixty-five. 

These limits are set by the IRS each year and will increase over time, as they are adjusted for inflation.

Planning for Retirement

Funds from a 401K or traditional IRA are taxed regardless of how the money is spent. With an HSA, as long as the money is spent on medical expenses, the money and your earnings will not be taxed. 

If you are over sixty-five and need the money for expenses other than medical, you can simply use the money as regular income and taxed as a 401K or traditional IRA would be, without additional tax penalties. 

The HSA also does not require account holders to withdraw funds at a certain age, as with some IRA’s and 401k’s. They can remain in the HSA for as long as the account holder wants.

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