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Health Savings Account Administrator
Using Your Health Savings Account to Build Retirement Savings
By Wiley Long
Health Savings Accounts are an excellent way to build a second retirement
account. These tax-favored accounts, which have only been available
since January of 2004, can be opened by anyone with a qualifying
high-deductible health insurance plan. Once you open an HSA account,
you can place tax-deductible contributions into it, which grow
tax-deferred like an IRA. You may withdraw money tax-free to pay for
medical expenses at any time. The biggest reason more people don't
retire before age 65 is lack of health insurance, and many Americans
reach age 65 woefully unprepared for the medical expenses they'll
face once they do retire. One of the most important long-term
reasons for establishing an HSA is to build up some money for
medical expenses incurred during retirement.
Fidelity Investments reports that the average couple retiring in
2006 will need $190,000 to cover medical expenses during retirement.
This assumes life expectancies of 15 years for the husband and 20
years for the wife.
HSAs are, without exception, the best way to build up money to
pay for medical expenses during retirement. You should not
contribute any money to your traditional IRA, 401 (k), or any other
savings account until you have maximized your contribution to your
HSA. This is because only health savings accounts allow you to make
withdrawals tax-free to pay for medical expenses. You can take these
distributions anytime before or after age 65.
Your HSA contributions won't affect your IRA limits -- $3,000 per year or
$3,600 for those over 55. It's just another tax-deferred way to save
for retirement, with the added advantage being that you can withdraw
funds tax-free if they are used to pay for medical expenses.
For early retirees who are healthy, a health savings account can
also be a smart option to help lower their health insurance costs
while they wait for their Medicare coverage. The older someone is,
the more they can save with an HSA plan. For many people in their
50's and 60's who are not yet eligible for Medicare, HSAs are by far
the most affordable option.
Any money you deposit in your health savings account is 100%
tax-deductible, and the money in the account grows tax-deferred like
an IRA. For 2006, the maximum contribution for a single person is
the lesser amount of your deductible or $2,700. In other words, if
your deductible is $3,000, you can contribute a maximum of $2,700;
if your deductible is $2,000, then that is the maximum. For
families, maximum is the lesser of $5,450 or the deductible.
If you're 55 and older, you can put in an extra $700 catch-up
contribution in 2006, $800 in 2007, $900 in 2008, and an additional
$1,000 from 2009 onward. The contribution limit is indexed to the
Consumer Price Index (CPI), so it will increase at the rate of
inflation each year.
How much you accumulate in your HSA will depend on how much you
contribute each year, the number of years you contribute, the
investment return you get, and how long you go before withdrawing
money from the account. If you regularly fund your HSA, and are
fortunate enough to be healthy and not use a lot of medical care, a
substantial amount of wealth can build up in your account.
Health savings accounts are self-directed, meaning that you have
almost total control over where you invest your funds. There are
numerous banks that can act as your HSA administrator. Some offer
only savings accounts, while others offer mutual funds or access to
a full-service brokerage where you may place your money in stocks,
bonds, mutual funds, or any number of investment vehicles.
One of the biggest advantages of retirement accounts like HSAs
are that the funds are allowed to grow without being taxed each
year. This can dramatically increase your return. For example, if
you are in the 33% tax bracket, you would need a 15% return on a
taxable investment to match a tax-deferred yield of only 10%.
As another example, if you are in a 33% tax bracket and were to
invest $5,450 each year in a taxable investment that yielded a 15%
return, you would have $312,149 after 20 years. If you put that same
money in a tax-deferred investment vehicle like an HSA, you would
have $558,317 - over $240,000 more.
Because catch-up contributions are allowed only for people age 55
and older, if one or both of you are under age 55 you should
establish your HSA in the older spouse's name. This will allow you
to capitalize on the expanded HSA contribution limits for people in
this age range and maximize your HSA contributions. Once that person
turns 65 and is no longer eligible to contribute to their HSA, you
can open another health savings account in the younger spouse's
name.
Strategies to Maximize your HSA Account Growth
If your objective is to maximize the growth of your HSA in order
to build up additional funds for your retirement, there are three
important strategies you should implement.
Strategy #1: place your money in mutual funds or other
investments that have growth potential. Though this is riskier
than placing your money in an FDIC-insured savings account, it is
the only way to really take advantage of the tax-deferred growth
opportunity that an HSA provides.
Strategy #2: delay withdrawals from your account as long as
possible. Though you may withdraw money from your HSA tax-free
at any time to pay for qualified medical expenses, you do have the
option of leaving the money in the HSA so that it continues to grow
tax-free. As long as you save your receipts, you can make medical
withdrawals from your account tax-free at any future date to
reimburse yourself for medical expenses incurred today.
As an example, let's say a 45 year old couple places $5,450 per
year in their HSA over a period of 20 years, they have $2,000 per
year in qualified medical expenses, and they get a 12% return on
their investments. If they withdraw the $2,000 from their HSA each
year, they'll have a net contribution of $3,450 per year into their
account, and they'll have $248,581 in their account when they begin
their retirement years.
If on the other hand they delay withdrawing that money, they will
have $392,686 in their account at age 65. If they choose they can
withdraw the $40,000 to reimburse themselves tax-free for the
medical expenses incurred during that 20 year period, and still have
$352,686 in their account - over $100,000 more than if they had
withdrawn the money each year.
Strategy #3: make the maximum allowable deposit to your HSA at
the beginning of each year. Even though you are allowed until
April 15 of the following year to make deposits to your HSA, you
should take advantage of the tax-free growth in your account by
funding it as soon as possible. The extra interest you can earn by
contributing to your account on January 1 of each year rather than
the next April 15 can amount to over $40,000 in a 20 year period,
and over $100,000 in 30 years.
Using Your HSA to Pay for Medical Expenses during Retirement
When you enroll in Medicare, you can use your account to pay
Medicare premiums, deductibles, copays, and coinsurance under any
part of Medicare. If you have retiree health benefits through your
former employer, you can also use your account to pay for your share
of retiree medical insurance premiums. The one expense you cannot
use your account for is to purchase a Medicare supplemental
insurance or "Medigap" policy.
Though Medicare will pay for the majority of health expenses
during retirement, there many be expenses that Medicare will not
cover. Nursing home expenses, un-conventional treatments for
terminal illnesses, and proactive health screenings are all examples
of medical expenses that will not be paid for by Medicare, but that
you can pay for from your HSA.
Long-term care is assistance with the activities of daily living,
such as dressing, bathing, or feeding yourself. It can be provided
in your home, a retirement community, or a nursing home. Long-term
care expenses can be paid for using funds from your HSA, and
long-term care insurance can even be paid for from the HSA up to the
following maximum annual amounts:
- Age 40 or under: $260
- Age 41 to 50: $490
- Age 51 to 60: $980
- Age 61 to 70: $2,600
- Age 71 or over: $3,250
To establish a health savings account, you must first own an HSA-qualified
high deductible health insurance plan. Compare HSA plans side by
side to determine the best value to meet your needs. Once you have
your high deductible health insurance plan in place, you can open
your Health Savings Account with the financial institution of your
choice.
About the Author
By Wiley Long - President, HSA for America
http://www.health--savings--accounts.com. HSA for America makes it easy to learn about and set up a
health savings
account that best meets your needs. Please link to this site
when using this article.
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