The Health IRA

Health savings accounts (HSAs) are tax-deductible savings plans that allow you to put aside savings for future health care expenses. HSAs were introduced in 2004 as part of the Medicare Prescription Drug, Improvement, and Modernization Act, which was signed into law by President George W. Bush. Since their creation, advancements in technology and popularity have allowed investors to not only access their HSAs more efficiently but also grow their accounts considerably.

While HSAs are primarily known as a tax-advantage plan for paying medical expenses, they can also help you save for retirement. Although it has become common practice that we income earners should contribute to our respective company-sponsored retirement plans or similar workplace defined contribution plans and other IRAs as the best way to save or invest our way towards retirement, recent developments in HSAs have created new strategies to help work towards financial independence and retirement expenses.

Before getting into potential strategies for Health Savings Accounts, let’s first look at who is eligible to open a Health Savings Account:

  • Must be 18 years of age or older
  • Must be covered under a qualified high-deductible health plan (HDHP). For 2020, the IRS defines an HDHP as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family.
  • May not be covered under any health plan that is not a qualified HDHP
  • May not be claimed as a dependent on another individual’s tax return
  • Cannot be over the age of 65

Now, if you meet the criteria listed above, you are eligible to set up a Health Savings Account. Here is where the fun begins. HSA holders in 2020 can choose to contribute up to $3,500 for an individual and $7,000 for a family (HSA holders 55 and older get to save an extra $1,000). HSAs are considered ‘triple tax-free’ assets. 1) All contributions to your HSA account are tax-deductible. 2) All funds in your account grow tax-free. 3) Withdrawals to pay for qualified medical expenses are tax-free. Unlike a 401(k) or IRA, an HSA does not require the account-holder to begin withdrawing funds at a certain age. However, funds taken out for non-qualified expenses are both taxed and incur a 20% penalty if made before age 65. After age 65, non-qualified withdrawals are still taxed but have no penalty.

As the popularity of these accounts has increased over the years, we have seen more and more HSA providers include investment options as an added benefit to their services, which gives investors all the more reason to take advantage of the benefits of HSAs. What we suggest as a long-term strategy to turn your HSA from a healthcare plan to a retirement strategy is:

  1. To max out your contribution every year.
  2. Don’t spend it! This may sound counterintuitive, but we’re looking at an HSA primarily as an investment tool and tax-exempt future bucket of money. Let it grow!
  3. Keep all of your medical receipts. That $900 invoice for physical therapy in 2019 can be used anytime in the future; for example, you can pull that $900 out in 2059 tax-free!
  4. The key to maximizing your unspent contributions, of course, is to invest them wisely. Don’t leave your HSA account in cash!
  5. It may be wise to set up a separate savings account for unplanned future medical expenses so that you aren’t scrambling to find funds to pay for these expenses out of pocket.

In golf, we are all familiar with the main clubs in our bag. Our woods, irons, and (eventually) the putter. However, every once in a while we need a little extra help getting our ball to the green. That’s where the rescue club comes into play. If your woods and irons are your 401(k) and IRAs, then the HSA is kind of like your rescue club to give you that extra push towards the green. The HSA can be a great addition to your long-term planning.

Do you still have questions about HSAs and how they fit into your overall plan? Please do not hesitate to reach out to your dedicated DWM team members to learn about new developments in this area, and how an HSA may fit into your overall planning.

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