How can a 14 year-old help you have a healthy retirement? If it’s a Health Savings Account (HSA), it is relatively easy.
What are HSAs?
This year marks the 14th anniversary of HSAs. These accounts were created in 2003 to allow individuals covered by high-deductible health plans (HDHP) to receive tax-preferred treatment of money saved for medical expenses. According to the Employee Benefit Research Institute (EBRI), enrollment in HSA-eligible health plans has increased and is estimated to range from 15.5 million to 20.4 million policyholders and their dependents in 2013.
Health savings accounts offer triple-tax advantages:
- Contributions to an HSA are deductible from taxable income.
- HSAs grow tax-free.
- Withdrawals from HSAs are tax-free as well as long as the money is used for qualified health expenses.
Another plus is that HSAs are portable, so if you switch employers the money goes with you.
High Deductibles Needed with Health Savings Accounts
If you have a health insurance plan that is a HDHP and meets other criteria, you can contribute to an HSA. What’s considered high? Your yearly deductible before the plan starts paying must be at least $1,250 for an individual, $2,500 for a family. The Internal Revenue Service recently announced higher limits for 2015 on contributions to HSAs as well as for out-of-pocket spending under HDHP. Several preventive services are not subject to plan deductibles. (See chart below for more details.)
|HSA contribution limit (employer + employee)||Self-only: $3,400
|HSA catch-up contributions (age 55 or older)||$1,000|
|HDHP minimum deductibles||Self-only: $1,300
|HDHP maximum out-of-pocket amounts (deductibles, co-payments and other amounts; excludes premiums)||Self-only: $6,550
Since health care is a big chunk of retirement expenses, saving now can help you later. And, some individuals may find it advantageous to use an HSA as a savings vehicle not only for medical needs now but for health care expenses later—in retirement—and the savings numbers can be quite healthy. Consider that if a person contributes the maximum allowable amount and invests the money at 2.5 percent rate of return for 40 years, they can save up to $360,000. With a 5 percent return on investment, the total can reach $600,000 for the same period of time.
So, what’s the catch? Start early and do not make any withdrawals until retirement. (This means not tapping the money for current health costs. While this may be hard for some individuals, the payoff is big.
If you use HSA money for non-medical expenses, you will pay income tax on the withdrawal, plus a penalty of 20 percent. (After age 65, you will pay taxes but no penalty.)
Saving for a Healthy Retirement with an HSA
To celebrate HSA’s 10-year anniversary, find out more about HSAs and how they can leave a healthy mark on your retirement.
To make your HSA grow to a healthier amount, you can self-direct the investments the HSA makes by investing in alternative assets you already know and understand. This option provides you the potential to build a much larger nest egg to pay for your health care costs. And with Americans living longer and facing rising health care costs, every dollar counts.
The accumulated funds may be withdrawn tax-free to be used for qualified medical expenses. After age 65, the account holder may use the funds for anything deemed necessary without penalty.
If you need help determining if you qualify for a HSA, consult with one of the professionals at Next Generation Trust Services.
You may also make a one-time (per lifetime) tax-free rollover of funds from an IRA into an HSA. That rollover amount must comply with the prevailing annual contribution limit. We recommend you consult your tax professional regarding these transactions to ensure you are doing so to your advantage and within IRS guidelines. There are restrictions regarding these rollovers and your health plan enrollment requirements; we are happy to answer questions about self-directed HSAs, so contact Next Generation Trust Services at (888) 857-8058 or Info@NextGenerationTrust.com.