Health Savings Accounts

Health Savings Accounts

The Health Savings Account (HSA) is similar to retirement accounts like an IRA or a 401k, but it is unique in that it enjoys both the benefit of tax-deductible contributions and tax-free distributions (as long as they are for medical expenses). This special tax treatment of the HSA has created a wrinkle in the traditional approach of funding retirement accounts.  Due to the inevitability of medical expenses in retirement, the best way to save for retirement (or at least for a portion of retirement expenses) is to use a health savings account for retirement in addition to a 401k or IRA alone.

The contribution limit is low ($3,350), but there are no phase-out's for higher income earners. Anyone, individuals, employees and employers, can open an HSA but you must have a corresponding high deductible health policy. More technically, an HSA can be established for any individual that meets all of the following:

  • is covered by a high deductible health plan
  • is not covered by another health plan
  • is not eligible to be claimed as a dependent on another person's tax return
  • is not entitled to Medicare benefits

One other benefit is that there are no Required Minimum Distribution requirements on an HSA. Funds can be contributed now and grow tax-free for years or even decades, before being used. The only requirement at the time of distribution for tax-free treatment is that the withdrawal either cover a current medical expense, or be used to reimburse a prior one. There is a 20 percent penalty assessed if the funds are used for a non-medical expense, but I can safely say that into your retirement years finding an eligible expense won't be an issue.

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