Monday, August 16, 2010

18) HSAs: Riskless Retirement?


peaking of the flexibility that insurance products can offer, consider the HSA (Health Savings Account).

            A health savings account must be sponsored by a business (either your employer or yourself, if self-employed).

            It’s like an IRA for medical expenses instead of retirement.

            Your contributions are tax-deductible, and if you withdraw the funds for qualified medical expenses, the distributions come out tax-free.   Unlike a Flexible Spending Account, which is ‘use it or lose’ come year-end; an HSA’s money remains and continues to accumulate earnings.

            When HSA funds are needed, you generally have both a checkbook and a Visa/MC debit card.  The funds can be used for a wider variety of medically related expenses than heath insurance will generally cover.  This list is, basically, the same as the medical expenses that are deducted from income taxes.

            Over time, if you accumulate a lot of cash, you can invest the money in savings accounts or mutual funds.  Later (e.g. age 65), it can be used for retirement.

            Annually, if you use the funds, you stop at the point that you’ve satisfied the deductible on the sister health insurance policy (e.g. $5,000); then that health insurance kicks in.

            You must pair an HSA with a special high-deductible health insurance policy, which is available and referred to as ‘High-Deductible Health Plan’ (HDHP), versus any other kind of health insurance.

            There are limits on how much you can contribute (they change each year); and there are limits on how much of your costs and contributions can be deducted from your taxes.

            So the benefits and advantages of an HSA include:

·         You can open an HSA until April 15th for the prior year

·         Your contributions are tax-deductible all the way until your timely tax filing date

·         You can use it on any tax-deductible medical expense

·         You can choose your own medical practitioners (no referrals/gatekeepers)

·         Your distributions are tax-free if used for qualified medical expenses (you get a tax form at the end of the year)

·         You have an ‘emergency fund’ - you can access the money for non-qualified reasons should you have an emergency (unlike health insurance) - however, you may owe taxes and penalties)

·         The funds are not "use it or lose it"

·         You can invest the money and it grows tax-free

·         You can use the unused balance for retirement at age 65

·         You incur lower insurance premiums (due to the high deductible on the HDHP)

·         You, the employee, are the owner of the account

·         The account is transferable to your spouse at divorce, separation or death

·         You can name beneficiaries

            HSAs are pretty cool.  I use one.  I’m cool.

            For a list of acceptable and unacceptable HSA expenses, go to

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