How does an HSA work like an IRA?
A health savings account is designed to cover your medical deductible in addition to any out-of-pocket expenses. However, if you are in good health and have manageable medical costs, your HSA can work to your benefit in a different way during retirement. But how does this happen? If you continue to put money into your HSA but do not experience health issues in which you need to withdraw funds, the HSA account will grow, acting like a Traditional IRA.
Similar to a Traditional IRA, any contributions to the HSA will be pre-tax, the balance is allowed to rollover from year to year, and it will grow tax-free. Your HSA funds that have not been used for medical expenses can be withdrawn after age 65 without a penalty. In addition, the money can be withdrawn for any expenses, not just health-related expenses. Like a Traditional IRA, you will be taxed on any distributions that aren’t being used for health expenses. But for withdrawals made in retirement for medically approved expenses your HSA functions as a Roth IRA as the funds are not taxed. An HSA also has a contribution limit. For example, in 2014 the limit was $3,300 for an individual and $6,550 for a family. If you are over the age of 55, you can add an extra $1,000 per year in catch-up contributions.
For an HSA to function effectively as both a Traditional IRA and Roth IRA you will need to be very healthy, having low medical costs that allow your account balance to grow over time. To qualify for an HSA, you must enroll in a high-deductible health plan. While this is not typically an issue for most physicians, these plans are different from other healthcare plans that offer a fair amount of benefits. The deductible minimum currently set by the IRS is $1,250 for individual coverage and $2,500 for families.
If you fall into the categories we mentioned above, an HSA will allow you to contribute more of your income to tax-advantaged accounts, resulting in a decreased income tax liability and higher savings rate. So, if you and/or your family’s health care costs run low, a multitude of benefits are available with an HSA if you choose to enroll into a high-deductible healthcare plan.
How much can you save by using your HSA as an IRA?
According to a recent Employee Benefit Research study, a dedicated saver could amass $360,000 in an HSA in 40 years, assuming there is a 2.5% return. While everything in life has its drawbacks, it is clear to see there are several great advantages to allowing your HSA to function like an IRA. The reality is, you and your family will have to pay for health care anyway. Paying for it in the form of an HSA, with the benefits of tax-free money, could very well make your retirement more enjoyable and affordable.
Contact us today to share additional insights on Health Savings Account plans and how it can function as an IRA account for you and your family.