Nearly everyone is familiar with IRA, 401(k) or 403(b) accounts. These tax advantaged investments allow investors to use pre-tax dollars to save for retirement. Many people unfortunately are unaware of the tax benefits available through Health Savings Accounts (HSAs). With rising health care expenses – a 65 year old couple retiring today will spend about $245,000 on medical expenses over the next two decades – HSAs offer the potential for significant tax savings and even the possibility for retirement savings. As a Wall Street Journal article recently explained: “When saving for retirement, there is a place to put money that may be even better than your 401(k)” (“HSAs Offer Benefits Over 401(k)s”; 1/30/2016).
Let’s first consider the basics. An HSA can be established by an employer or an individual. To be eligible, you must have a high deductible health insurance plan. The minimum deductible must be $1300 if you are single or $2600 if married with a maximum deductible of $6550 or $13,100 if married. You also cannot be claimed as a dependent on someone else’s tax return and cannot be enrolled in Medicare.
The 2016 maximum annual contributions to an HSA is $3350 for an individual and $6750 for a family. If you are over 55, those figures are increased by $1000. Money contributed and not used by December 31 simply rolls over to the next year.
What makes an HSA so beneficial is that it is “triple tax advantaged” because:
- It’s funded with deductible pre-tax dollars through payroll deposits (like a 401(k)) or with after-tax dollars (by an individual).
- All earnings and interest are tax free.
- All withdrawals for qualified medical expenses are tax free.
The biggest payoff with an HSA comes by allowing the contributions to grow, tax-deferred rather than withdrawing money to pay current medical expenses. By contributing only $4000 per year to an HSA after 20 years at 6% annual growth, the account value will exceed $155,000. Imagine having an account that size available to pay medical expenses tax free. Furthermore, after age 65, HSA withdrawals are permitted for any purpose subject to taxation at your current tax rate (like an IRA). It’s almost too good to be true – so take advantage of it.