Health
Savings Accounts
When
doing tax planning, one of the options we recommend people consider is opening
a Health Savings Account, or HSA. HSAs are similar to IRAs - they let
you put money aside for future use, and receive special tax benefits.
An
IRA allows you to put money aside that you are not taxed on now, but that you
pay taxes on once you access the money. With a Roth IRA you pay taxes
on the money now, but not later when you withdraw the funds. With an HSA,
if the money is only spent on qualified medical expenses, you never pay taxes
on deposits or withdrawals.
How
HSAs Work
HSAs
may only be opened and funded if you have a qualifying high deductible health
insurance plan. These plans have deductibles between $1100 and $5500 for
individuals, and between $2200 and $11,000 for families. If you purchase
your own health insurance, make sure to ask your agent about HSA-qualified plans.
If you are covered by an employer, see if they make these plans available.
Many employers will also help you fund the HSA.
Those
who qualify are allowed to deposit into their account up to $2850 per year for
individuals, and $5650 per year for families. The contribution is 100%
deductible on your 1040, and most states also give a tax-deduction.
Tax
Savings
In
addition to the immediate tax savings, one of the biggest advantages of retirement
accounts like HSAs are that the funds are allowed to grow without being taxed
each year. This can dramatically increase your return. For example,
if you are in the 33% tax bracket, you would need a 15% return on a taxable
investment to match a tax-deferred yield of only 10%.
As
another example, if you are in a 33% tax bracket and were to invest $5,650 each
year in a taxable investment that yielded a 15% return, you would have $312,149
after 20 years. If you put that same money in a tax-deferred investment
vehicle like an HSA, you would have $558,317 - over $240,000 more.
Saving
for Retirement
The
biggest reason more people don't retire before age 65 is lack of health insurance,
and many Americans reach age 65 woefully unprepared for the medical expenses
they'll face once they do retire. One of the most important long-term
reasons for establishing an HSA is to build up some money for medical expenses
incurred during retirement.
Fidelity
Investments reports that the average couple retiring in 2006 will need $200,000
just to cover medical expenses during retirement. HSAs are, without exception,
the best way to build up money to pay for medical expenses during retirement.
Because only Health Savings Accounts allow you to make withdrawals tax-free
to pay for medical expenses, you should maximize your HSA contribution before
you contribute any money to your traditional IRA, or 401 (k). You can
take these distributions anytime before or after age 65.
Your
HSA contributions won't affect your IRA limits -- $3,000 per year or $3,600
for those over 55. It's just another tax-deferred way to save for retirement,
with the added advantage being that you can withdraw funds tax-free if they
are used to pay for medical expenses.
For
early retirees who are healthy, a Health Savings Account can also be a smart
option to help lower their health insurance costs while they wait for their
Medicare coverage. The older someone is, the more they can save with an
HSA plan. For many people in their 50's and 60's who are not yet eligible
for Medicare, HSAs are by far the most affordable option.
Lower
Insurance Premiums
Because
they have higher deductibles, HSA plans are usually much less expensive than
traditional co-pay plans. Individual health insurance plans are individually
underwritten, so pre-existing health conditions could prevent you from qualifying
or result in a rate-up or having exclusions placed on your policy. To
get an instant quote on available plans, fill in your zip code below.
