Tahoe-Truckee Market Beat: The benefits of a Health Savings Account
Health Savings Accounts or HSAs can be excellent financial planning tools. If you’re saving for retirement and have maxed out your IRA or employer sponsored retirement plan contributions, you can use an HSA to get further tax deductions and more money growing tax deferred that can be used for retirement if it’s not needed for qualified medical expenses.
To be eligible for an HSA, you must be enrolled in an HSA-qualified health plan, cannot have an FSA (Flexible Spending Account), and you cannot be enrolled in Medicare, Medicaid or Tricare.
HSA-qualified plans are high deductible health insurance plans. Your insurance provider or human resources person should be able to tell you if your health plan is HSA-qualified.
For 2016 the minimum deductible to qualify for an HSA is $1,300 for an individual or $2,600 for a family plan. The max out of pocket expense is $6,550 for an individual and $13,100 for a family.
The contribution limits for 2016 are $3,350 for an individual and $6,750 for a family plan. An extra $1,000 catch up provision is available for persons over the age of 55. Contributions are made on a pre-tax basis.
Distributions for HSAs can only be used for qualified medical expenses. If you take a distribution that is not qualified it is subject to income tax and a 20% tax penalty.
Once you reach age 65 you no longer have to pay the 20% penalty, but still have to pay income tax on nonqualified distributions, so they are similar to traditional IRAS in that regard. If you don’t need your savings for medical costs they can be used to supplement your retirement income.
Funds within an HSA can be invested in a variety of mutual funds similar to your IRA or 401k account and they get the advantage of tax deferred growth, just like an IRA.
Here’s a simple hypothetical example. Say you’re 35 years old and don’t have access to an employer sponsored plan, so you use an IRA. Your contribution limit on the IRA alone is $5,500 per year; if you maxed that every year for thirty years and got a 7% return, your retirement account would grow to $480,406 at age 65.
If you added an HSA and didn’t need the funds for medical purposes, you could save an additional $3,350 per year pre-tax and the two accounts would grow to a total of $773,017.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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