How Can a #Healthcare Savings Account (#HSA) Improve Your #Retirement Plan?

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What  is an HSA? I have heard some say it’s like a "Roth IRA on steroids".

Healthcare Savings Accounts (A.K.A. HSA’s) are becoming more popular in use with high-deductible health-care plans (HDHP), as this latter health-care option becomes the norm. According to the IRS a “ health savings account (HSA) is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. You must be an eligible individual to qualify for an HSA."

So how can an HSA improve a retirement plan?

Tax-deductible Contributions

Like an IRA (Individual Retirement account), contributions to an HSA are tax-deductible (according to IRA limit rules). So taxes are reduced now, and HSA’s can be used in addition to IRA contributions to further reduce taxes in a calendar year. As there is no income phase-out parameter (or income restrictions) on these accounts, (unlike with a Roth IRA) this creates an opportunity for an additional retirement vehicle –  another “tool” in your retirement toolbox  as they are triple tax free - which is especially important for high net worth clients looking to defer income and reduce their tax-burden or those looking to close a retirement savings gap.

Tax-free Growth & Withdrawals

HSA’s grow tax-free, like a Roth IRA, and allow tax-free withdrawals for "qualified" medical expenses, such as deductibles and co-pays. This is particularly important in retirement when health-care costs will be higher. So it can makes sense, from a long-term retirement strategy perspective, to fund an HSA (when permissible), allow it to take advantage of tax-free compounding, and withdraw from it later in life – funding current medical expenses from cash-flow or other disposable income when feasible.

Portability

“Use it or lose it” in a single year - No problem! HSA’s are portable, so even if you leave your job or leave the workforce, you do not have to “use it or lose it” in a single year like a Flexible Savings Account (FSA).

No RMD’s (Required Minimum Distributions)

Worried about increased income and subsequently increased taxes in retirement due to Required Minimum Distributions (RMD's) like from IRA's?  Unlike an IRA (Individual Retirment Account), there are no RMD’s on an HSA. You do not have to make a withdrawal, "qualified" withdrawals for medical expenses are not taxable, and the longer you allow the funds to grow tax-free, the greater the benefit.

Ability to defer tax-free withdrawals

There is no time limit on receipts for qualified unreimbursed expenses incurred previously, when an individual owned an HSA. (Internal Revenue Bulletin:  2004-33) So a tax-free withdrawal can be made in future years based on those past receipts when you had an HSA.  For example, Colleen had 18K in qualified expenses (let’ say for orthodontic expenses for her 3 children over a 5 year period) while having an HSA and she used a payment plan to pay for those expenses out-of-pocket. Years later, Colleen finds that it would be nice to have extra cash for that rental income property she is looking to acquire. She can get a tax-free withdrawal from her HSA now using those qualified receipts from the past.

NOTE:

Be aware of HSA distribution rules, as well as penalties, and taxation for "non-qualified" medical distributions - see IRS Publication 969 for this information.

Consult a Certified Financial Planner for comprehensive advice on strategies that address your specific retirement planning needs. See www.CFP.net or www.oneconnect.net.