The health savings account, or HSA, isn’t just a powerful tool for helping you to save against the potential effects of out-of-pocket health care costs. For those who don’t have to spend the money on health care, these accounts potentially become a potent asset for the accumulation of retirement wealth.
Background
According to the market research firm Devenir, Americans now hold more than $28 billion in assets in HSAs and that number is growing fast. By the end of 2017, there will be 25 million HSA accounts in existence holding over 46 billion, according to Devenir researchers.
Unlike health care flexible savings accounts, or FSAs, however, there’s no ‘use it or lose it’ rule that forces you to empty your account each year or forfeit it back to an employer. You, and not your employer, control your HSA, and you personally own your HDHP policy.
Why They Make Great Retirement Tools
Contributions you make to your HSA are tax-deductible, even if you don’t itemize. These contributions are an ‘above-the-line’ deduction, even if you take the standard deduction. If your employer makes contributions on your behalf, those contributions are not taxable to you, either.
Secondly, money within your HSA grows tax-deferred, just like a traditional IRA or 401(k) account. There are no capital gains or income taxes due on HSA assets as long as you leave the HSA in the account.
If you need the money for qualified medical expenses, your withdrawals to pay for these costs are tax-free. That’s a terrific deal all around. But what if you don’t need the money for health care costs?
In that case, you have an opportunity: If you can wait until after you turn age 65 to withdraw the money, the account behaves like a traditional IRA or 401(k). You just pay income tax on the amounts you withdraw, with no penalty (a 20 percent penalty applies to non-qualified withdrawals prior to age 65, which is twice as bad as the penalty for early withdrawals for IRAs and 401(k)s, so don’t get stung by this requirement!
How to make the most of your HSA
The combination of tax-deductible contributions, tax-deferred growth and tax-free growth for qualified medical expense is extremely powerful. But according to the Devenir Group and a recent white paper, only about 3 percent of HSA owners are making the most of these tax advantages by investing their HSA balances for growth. Too often, it simply does not occur to HSA owners to take assets within their health care plan and invest them at competitive rates of return.
Not every HSA provider offers investment services, however. If you want to invest your HSA balance in mutual funds, bonds, stocks, real estate or anything else, you need to find a broker that will allow it. An increasing number of providers are coming online to offer these services, and some will even act as custodians for self-directed retirement accounts, which enable you to take more personal and direct control of your HSA assets and invest them in a much wider variety of asset classes than are normally available from many carriers.
Beware of Prohibited Transaction Rules
If you do use your HSA to invest, do not commingle the account’s money with your personal funds. Also, don’t attempt to use the account to buy from, sell to, borrow from yourself, your spouse, ascendants or descendants of yourself or your spouse, nor anyone who advises you on your HSA.
Eligibility and Contribution Limits
To qualify for a health savings account, you must be covered by a high deductible health plan, or HDHP. As of 2016, the minimum deductibles allowable on these plans are $1,300 for singles or $2,600 for family plans, but deductibles cannot exceed $6,550 for an individual and $13,100 for a family.
As long as you are enrolled in an HDHP, and that HDHP is your only coverage, no one else can claim you as a dependent, and you are not enrolled in Medicare, you can make tax-deductible contributions of up to $3,350 for individual plans and up to $6,750 for family plans. If you are age 55 or older, you qualify to contribute an extra $1,000 per month.
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