Health savings accounts are a great way to create a second retirement account. Anyone with qualified, highly deductible health insurance can open these tax-friendly accounts, which have only been around since January 2004. Once you open an HSA, you can make tax-deductible contributions that grow with the back tax payment like an IRA. You can withdraw tax-free money to pay medical expenses at any time.
The main reason more people don’t retire before age 65 is because they don’t have health insurance. One of the top long-term reasons for starting an HSA is to raise funds for retirement medical expenses.
Fidelity Investments reports that the average married couple who will retire in 2006 will need $ 190,000 to cover medical expenses during retirement. This assumes a life expectancy of 15 years for the husband and 20 years for the wife.
HSAs are invariably the best way to raise funds to pay for medical expenses in retirement. You should not deposit funds into your traditional IRA, 401 (k), or any other savings account until you have maximized your contribution to your HSA. Because only health savings accounts allow you to make tax-free withdrawals to pay medical expenses. You can take these distributions at any time before or after the age of 65.
Contributions to the Healthy Saving Account
Your contributions to the HSA will not affect your IRA boundaries: $ 3,000 per year or $ 3,600 for those aged 55 and over. It’s just another way to save for tax-privileged retirement, with the added bonus of being able to withdraw funds tax-free when they are used to pay medical expenses.
For early retirees in good health, a health savings account can also be a smart choice to lower your health insurance costs while you wait for your Medicare coverage. The older a person is, the more they can save with an HSA plan. For many people between the ages of 50 and 60 who are not yet eligible for Medicare, HSAs are by far the cheapest option.
Any money you put into your health savings account is 100% tax deductible, and the money in the account grows like an IRA tax-deductible. For 2006, the maximum contribution for a single person is the lower deductible, or $ 2,700. In other words, if your deductible is $ 3,000, you can deposit a maximum of $ 2,700; If your deductible is $ 2,000, that’s the maximum. For families, the maximum is the lower of $ 5,450 or the deductible.
If you are 55 years of age or older, you can make an additional $ 700 remediation contribution in 2006, $ 800 in 2007, $ 900 in 2008, and an additional $ 1,000 in 2009. The contribution limit is linked to the consumer price index (CPI.)), So that it will increase every year with the inflation rate.
The amount you accumulate in your HSA depends on how much you deposit each year, how many years you deposit, how much your investment is, and how long it takes to withdraw funds from the account. If you fund your HSA on a regular basis and are lucky enough to be healthy and not need a lot of health care, you can build significant wealth in your account (healthy saving account).
Health savings accounts are self-managed, which means that you have almost complete control over where you put your money. There are numerous banks that can act as your HSA administrator. Some only offer savings accounts while others offer mutual funds or access to a full-service brokerage where you can put your money in stocks, bonds, mutual funds, or any number of investment vehicles.
One of the biggest advantages of retirement accounts like HSAs is that funds can grow without having to pay taxes every year. This can increase your performance dramatically. For example, if you’re in the 33% tax bracket, you need a 15% return on a taxable investment to match a tax-privileged return of only 10%.
Another example, if you were in a 33% tax bracket and invested $ 5,450 each year in a taxable investment that returned 15%, you would have $ 312,149 after 20 years. If you invested the same money in a tax-privileged investment vehicle as an HSA, you would have $ 558,317 – more than $ 240,000 more.
Since repayment contributions are only allowed for people over 55 years of age, you must issue your HSA in the name of the older spouse if one or both of them are under 55 years of age. This will allow you to take advantage of the extended HSA contribution limits for people in that age group and maximize your HSA contributions. Once that person turns 65 and is no longer eligible to contribute to their HSA, they can open another health savings account in the name of the youngest spouse.
Strategies To Maximize The Growth Of Your Healthy Saving Account
If your goal is to maximize the growth of your HSA in order to raise additional funds for your retirement, there are three key strategies you need to implement.
Strategy # 1: Put your money in mutual funds or other investments with growth potential. While this is riskier than putting your money in an FDIC-insured savings account, it is the only way to really take advantage of the tax-deferred growth opportunities offered by an HSA.
Strategy n. # 2: Delay withdrawals from your account for as long as possible. Although you can always withdraw money from your HSA tax-free to pay qualified medical expenses, you have the option to keep the money with the HSA so that it continues to grow tax-free. As long as you keep your receipts, you can always make tax-free medical withdrawals from your account to reimburse you for today’s medical expenses.
As an example, let’s say a 45-year-old couple has invested $ 5,450 per year in their HSA, has $ 2,000 per year in qualified medical expenses, and has a 12% return on their investments over a 20 year period. If they withdraw the $ 2,000 from their HSA each year, they will have a net contribution of $ 3,450 per year in their account and they will have $ 248,581 in their account when their retirement years begin.
Conversely, if they delay paying out the money, they will have $ 392,686 in their account by the age of 65. If you wish, you can withdraw the $ 40,000 to reimburse yourself tax-free medical expenses over that 20 year period and still have $ 352,686 in your account, more than $ 100,000 more than if they had withdrawn the money every year.
Strategy n. # 3: Make the maximum allowable deposit into your HSA at the beginning of each year. While you can fund your HSA by April 15 of the following year, you should take advantage of the tax-free growth of your account by topping up your funds as soon as possible. The additional interest that you can earn by depositing into your account on January 1st of each year instead of April 15th can be more than $ 40,000 over a 20 year period and more than $ 100,000 in 30 years.
Use your Health Savings Accounts to pay for medical expenses in retirement
When you enroll in Medicare, you can use your account to pay Medicare premiums, deductibles, co-payments, and co-insurance under Medicare. If you have retired health insurance benefits through your former employer, you can also use your account to pay your portion of the pension insurance contributions. The only expense that you cannot use your account for is taking out Medicare supplemental insurance or a “Medigap” policy.
Although Medicare pays most of your health care expenses in retirement, there are many expenses that Medicare does not cover. Nursing home costs, unconventional treatments for terminal diseases, and proactive checkups are examples of medical expenses that Medicare doesn’t cover but that you can pay for with your health savings accounts.
Long-term care is the support in activities of daily living such as getting dressed, bathing or eating. It can be made available in your home, in a senior community, or in a nursing home. The care costs can be paid with funds from your HSA, the care insurance even up to the following annual maximum amounts with the Health Savings Accounts:
– 40 years of age or under: $ 260
– 41 to 50 years old: $ 490
– 51 to 60 years old: $ 980
– 61 to 70 years old: USD 2,600
– 71 years or older: $ 3,250
To set up a health savings account, you must first have HSA-qualified health insurance with a high deductible. Compare HSA plans side by side to determine the best value for your needs. As soon as you have taken out your health insurance with a high deductible, you can open your health savings account with a financial institution of your choice.