A health account that can boost your retirement nest egg?

An Unusual Way to Add Six Figures to Your Nest Egg

By Marc Lichtenfeld, Chief Income Strategist, The Oxford Club
Thursday, October 20, 2016

Health savings accounts (HSAs) are the greatest health/employment benefit since the eight-hour workday.

They offer a tax-advantaged way to cover planned and unplanned medical expenses and even certain Medicare premiums.

What most folks don’t realize is that an HSA isn’t just a holding place for cash. In many cases, your HSA bank or administrator will offer investment choices, including mutual funds, stocks and bonds.

So if you can afford to cover your medical expenses without dipping into your HSA, you can grow your HSA just like you’d grow a 401(k) or IRA.

Let me explain how HSAs work and how you can use one to supercharge your retirement savings.

Why HSAs?

An HSA is available to anyone with a high-deductible health plan (HDHP). If your individual plan has a deductible of $1,300 or more ($2,600 or more for a family), you’re eligible to open an HSA.

If you’re enrolled in one, you can contribute up to $3,400 individually, or $6,750 for a family, to your HSA. If you’re more than 55 years old, you can add another $1,000 on top of those figures. The money you contribute is pretax. So if you earn $100,000 per year and contribute $6,750 to an HSA, you will be taxed on only $93,250. That $6,750 contribution would save you $1,687 in taxes.

So HSA savers lower their taxes simply by putting money away that they’ll have to spend someday anyway. Someday is the key word. You don’t have to spend your money the year you contributed it to your HSA. It rolls over each year, so you can keep saving (and potentially even investing) for years.

You could use your HSA funds to pay for medical costs as they arise – copays, deductibles, prescriptions, dental visits, glasses, contact lenses, acupuncture, Medicare premiums, etc. When the bill arrives after a trip to the emergency room, it’s nice to have that money already set aside to pay for whatever insurance won’t cover. But, if you have the cash to cover these types of expenses without drawing on your HSA, you can use your HSA to turbocharge your retirement.

Many HSAs allow you to invest your funds. This means you can take the money in your HSA and invest it in a stock or diversified portfolio for the long term, growing your money for years until you decide to take it out.

The decision of when to withdraw is entirely up to you. So you have the benefit of flexibility. If something happens and you get hit with a big bill, you can use your HSA money to pay it if you choose.

And unlike a 401(k) or an IRA, there’s no required minimum distribution – meaning you don’t ever have to take the money out. You can let your money grow for as long as you want.

Meanwhile, your money grows tax-free for years until you need it.

If you were able to contribute the current family maximum of $6,750 per year and your money grew by 8% per year for 10 years, you’d wind up with $120,179. If you earned 12% per year you’d finish the decade with $153,632.

The only rule is the money must be used for healthcare costs.

Considering that the average couple is expected to spend more than $266,000 on healthcare in retirement, that shouldn’t be a problem.

If you withdraw before 65 and spend it on anything other than qualified healthcare expenses, you’ll pay a 20% penalty and income tax on the money you take out.

But if you’re 65 or older, you won’t incur the 20% penalty. You’ll just pay income tax on any funds used for nonmedical costs.

What happens if you don’t use your HSA money? If you pass away before you’ve spent it, your spouse can inherit it as an HSA.

If you leave the money to another beneficiary, it is taxable – though they can use the funds to pay your medical expenses incurred before death tax-free.

Bear in mind that if you’re already enrolled in Medicare, you don’t qualify for an HSA. If you have an existing HSA, you’ll be allowed to take distributions from that account, but you won’t be allowed to add to it.

But for anyone using a high-deductible health plan, an HSA is a great option.
At a minimum, HSAs lower your taxes and help you save for planned and unplanned healthcare costs. And by strategizing the right way, they can even help you add six figures to your retirement nest egg.

Good investing,

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