Health Savings Account or Retirement Investment Plan

We received a preview of an article that will be in the January 20, 2014 issue of Forbes, focused on using health savings accounts (HSA) for retirement savings, even if you are decades away from retiring.

Health Savings Account or Retirement Investment Plan
Health Savings Account or Retirement Investment Plan

Staff Writer, William Baldwin, first showed that your HSA is actually a “triple-tax-free form of retirement saving.”

(1) You get a deduction when you put the money in.
(2) It compounds tax free.
(3) It comes out tax free.

Let’s back up.  Do you know what an HSA is?  Here’s how Baldwin described it:

An HSA is a kitty, funded by you and/or your employer, that you are
supposed to use to cover deductibles and copays in a high-deductible
health insurance policy.

Let’s be clear.  This is how you’re supposed to use the funds, but not how you HAVE to use them.  AND, amounts you don’t draw down carry over from one year to the next, building up the balances.  Of course, most of the approximately 9,000 “HSA users find themselves with plenty of medical bills to pay and spend the money almost as fast as it comes in.”  However, there is a small fraction of those users that contribute to their account without making any withdrawls.

Also, “high-deductible” is defined as “at least $1,250 for an individual policy and $2,500 for a family policy.”

Baldwin writes:

To get the most out of this tax shelter you have to run up medical bills
over the next several decades that, cumulatively, exceed your account
balance. You also have to be aware of a peculiar rule that says you can
make retroactive claims, explains Eric Remjeske, whose Minneapolis firm,
Devenir, helps HSA providers design investment menus.

Remjeske advises:

Let’s say you get a $1,000 doctor bill you owe because you haven’t met
the steep deductible in your insurance plan. Keep your HSA debit card in
your wallet, advises Remjeske. Whip out another credit card, maybe one
with reward points, whose balance you scrupulously pay in full every
month, for the doctor.

Now what? Put the doctor bill in a shoe box until you’re retired. The
$1,000 you didn’t withdraw from the HSA has grown to, say, $3,000. Now
you take the money out, and match it against the ancient bill plus
$2,000 of other medical costs incurred in the meantime. In effect, you
have created $3,000 of retirement income with no tax on it.

As Baldwin wrote:

That’s as good as a Roth IRA account–no, better, because the money was
deducted on the way in, a benefit not available on your Roth savings.
HSA contributions from your employer, and your own, if deducted from
your paycheck, never appear in your income. If you are self-employed,
the HSA contribution reduces your adjusted gross income, a powerful form
of tax deduction.

There is one caviate.  Remember Baldwin described the HSA as a triple benefit?  Well, what if:

What if you are so healthy, or do so well with your investments, that
your HSA tops your lifetime medical costs? That would be a nice problem
to have. If it afflicts you, the triple tax shelter turns into a mere
double. HSA money withdrawn after age 65 and not matched against medical
costs is taxed like a 401(k) payout, as ordinary income.

But there are a lot of unreimbursed medical bills that can go into that
shoe box after being paid with funds from outside your HSA. The main one
that can’t is the premium to buy the high-deductible plan. Almost
anything else goes in, provided that the patient was covered at the time
by a high-deductible health insurance policy: copays, deductibles,
doctor bills that you owe because the doctor is not in your network,
braces for your kids, nursing home insurance, eyeglasses.

Once you are in Medicare, you can no longer contribute to the HSA, but
you can use the money on insurance premiums, including Medicare and
Medigap policies.

Is the look-back feature a loophole? Consider it a feature, not a bug.
Legislators set up the system to reward patients for selecting insurance
that makes them cost-conscious. If they also persuade people to save
for their old age, they will defer the day when nursing home costs send
Medicaid into bankruptcy.

Yes, these plans are readily available in the health insurance exchanges.

So, here’s the recommendations from the experts:

  1. Maximize all of your employer’s matches, including HSA and 401k;
  2. Think of your HSA as an emergency fund, remembering that once the funds are removed, they cannot be replaced;
  3. If you are an employee, contribute to whatever you can so that both you and your employer are saving on employment taxes (if you are self-employed, you don’t get this benefit);
  4. Get educated about investment options so that you aren’t paying for the most expensive option;
  5. Consider opening to HSAs if you and your spouse are over 55 years old; and
  6. Don’t wait too long to cash in, because your non-spousal heirs will need to pay taxes on these funds.

Do you have an HSA?  Are you maximizing its benefits?
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