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Consumer
Your HSA could supplement retirement funds
NEW YORK (06/17/14)--For healthy Americans, the best use of health savings accounts (HSAs) might be as supplementary retirement accounts, and not for paying medical expenses (Wall Street Journal June 2).

HSAs were created to help consumers save for medical expenses. They also provide powerful tax shelters. In 2014, a married couple can put away as much as $6,550 ($3,300 for an individual and, if age 55+, individuals and couples may save an extra $1,000) and have all or some of that money grow in tax-deferred investments.

If you open an HSA, you may use the money to pay for deductibles, co-pays, and other medical expenses. After age 65 you may withdraw the money, penalty-free, for nonmedical use. The money will be taxable at that time but you still will have benefitted from years of tax deferral.

To qualify to contribute to an HSA:
  • You can't be enrolled in Medicare. At age 65, if you switch to Medicare coverage you no longer may contribute to an HSA.
  • You can't be a dependent on someone else's tax return;
  • You must be covered under a qualifying high-deductible health plan (the 2014 deductible minimum is $1,250 for single coverage and $2,500 for family coverage); and
  • You may not have any other health coverage, but you can have dental, vision, disability, and long-term care coverage.
An HSA provides a triple tax benefit:
  • Your cash contributions to the account are 100% deductible;
  • Interest on savings accumulates tax-deferred;
  • Withdrawals from an HSA for qualified medical expenses (see irs.gov) are free from federal income tax;

At death, your HSA passes to your designated beneficiaries. It's tax-free for your spouse if used for qualifying expenses, and taxable for anyone else.

Because of the contribution limits, for many people an HSA will play only a minor part in paying for health-care costs in retirement. However, if you have good cash flow and liquidity, and are able to leave the money in the account, you could benefit from having an HSA and using it to supplement your retirement savings.

If you're employed and part of a group medical plan, ask your employer about an HSA. For others, many credit unions and other financial service providers offer HSAs. Compare fees and features across providers.

HSAs are complex and, if not administered properly, can cause adverse tax consequences. Make sure you understand plan details.

For related information, read "Everybody's Money Matters: Benefits of Health Savings Accounts" in the Home & Family Finance Resource Center.
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