Put Your Health Savings Account on Steroids through Self-Direction
Published on May 2, 2016
We’ve written before about the benefits of having a self-directed health savings account (HSA) as another way to enjoy tax-advantaged retirement savings and help you cover out-of-pocket medical expenses. As an investment account, you might find—especially if it’s self-directed—that you can build up a healthy retirement nest egg with an HSA.
If you participate in a high-deductible health plan—as many people do these days—you are eligible to open and contribute to an HSA, which is meant to pay for your qualified medical expenses. For 2016, a high-deductible health plan has a deductible for a single person of at least $1300 and $2600 for a family.
The contribution limits for 2016 are $3350 for an individual and $6750 for family coverage. If you are age 55 and older, you can make a “catch-up” contribution of an additional $1000.
Qualified health care expenses
- Medical and dental
- Prescription drug and vision expenses (including deductibles and co-payments)
- Long-term care services and the premiums for qualified long-term care insurance
- Premiums paid after age 65 for Medicare or your employer’s retiree medical plan (but not for Medicare supplement plans)
- COBRA premiums
What’s so great about HSAs?
There are some similarities to IRAs and non-matched 401(k) contributions; and, if you are using the money in the account for medical expenses, there is an added benefit (with additional goodies for account holders ages 65 and up).
- Contributions to the health savings account are deducted from your gross income.
- The contributions grow tax free in the account until you withdraw the money (for reasons other than medical expenses). Those withdrawals are taxed as ordinary income (plus 20% penalty if you are under age 65).
- Withdrawals from the HSA that go to pay for qualified medical expenses are tax free (no income tax on that money).
- Once you reach age 65, you can withdraw money from the HSA to pay for other expense, with no penalty applied. You will pay ordinary income taxes, just as you would on any withdrawals from deductible 401(k) plans and IRAs.
- Once you reach age 70-1/2, there is no required minimum distribution from the health savings account. You can keep the money in there as long as you’d like and let it grow in value if you don’t need it.
Want to make that account even more powerful? Consider a self-directed HSA.
A health savings account offers individuals a way to save specifically for health care expenses as well as a way to save for other future expenses they will incur during their retirement years. The funds you contribute will accumulate and grow and self-direction can inject a healthy dose of oomph to your retirement savings.
Through self-direction, savvy investors can build up greater retirement wealth by including nontraditional investments in their retirement plans, including HSAs. Do you already invest in real estate or commodities, precious metals or limited partnerships? These and many other alternative assets may be included in your self-directed health savings account. You can read up on what you can include in a self-directed retirement plan in this Next Generation Trust Services white paper.
With the stock market continuing to be unpredictable, those individuals who are comfortable making their own investment research and decisions, and who may already know and understand nontraditional investments, are finding self-direction to be the prescription for building a potentially more lucrative nest egg.
Of course, how you invest (and how and when you withdraw the funds) depends on your unique financial situation as well as your health in this case, so we recommend you consult your trusted financial advisor or tax professional about how to proceed. But, if you have questions about self-direction as a retirement wealth-building strategy or how to open a self-directed HSA, you can contact the professionals at Next Generation with your questions at 888.857.8058 or Info@NextGenerationTrust.com.
