Most folks are familiar with tax-advantaged retirement accounts like 401(k)s and IRAs. But how much do you know about health savings accounts, and how they can pad your retirement savings?
HSAs are on the rise — and with good reason. The number of health savings accounts increased by 16 percent in the year ending June 30. They now surpass 21 million, according to a recent trends report by Devenir Group, a firm that serves the HSA investment industry.
The amount of assets held within HSAs increased by 23 percent during the same period, reaching about $42.7 billion.
What is a health savings account?
An HSA is an account — either a savings or investment account — in which you can deposit a certain amount of pretax earnings each year that you can use to reimburse yourself for eligible health care expenses.
In addition, the money can be withdrawn tax-free for such expenses. In other words, you do not pay taxes on money you put into an HSA at the time you deposit it or at the time you withdraw it. I repeat: You never pay taxes on money that goes through an HSA.
That means HSAs have more tax advantages than other retirement accounts, including the best-known types:
- Traditional 401(k) and traditional IRA — You pay taxes on contributions when you withdraw money from the account.
- Roth 401(k) and Roth IRA — You pay taxes on contributions when you deposit money into the account.
Not everyone is eligible to contribute to an HSA, though. It’s meant for folks with high-deductible health insurance plans. For the 2017 tax year, the Internal Revenue Service defines such plans as having annual deductibles of at least:
- $1,300 for coverage of yourself only (rising to $1,350 for 2018)
- $2,600 for family coverage (rising to $2,700 for 2018)
Other benefits of a health savings accounts
As if being able to spend tax-free money on health care costs isn’t benefit enough, there are more upsides to HSAs.
Namely, as we note in “10 Tips to Maximize Your High-Deductible Health Plan,” any money you put in an HSA — and any interest or investment growth that money earns — remains in the account year after year if you don’t spend it.
So, if you have the means to deposit money into an HSA every year and postpone withdrawing money until retirement, it’s technically possible to use an HSA as another retirement account. Financial adviser Ray Martin explains in a recent CBS MoneyWatch column:
“Rather than using these accounts to pay for current out-of-pocket medical expenses, you should delay taking any withdrawals from your HSA until after retirement. If you’re able to do that, make sure the assets are in an investment account and allocate them into diversified stock mutual funds. This will position your HSA for a higher long-term growth rate, thus maximizing the benefit of tax-free growth.”
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