Close your eyes and picture it. An investment account that you can put away pre-tax income, that grows tax-deferred and comes out tax-free. Wouldn’t it be amazing. You could have the best of all worlds.
Well this investment vehicle exists today.
No really it does. It’s not like the Easter Bunny.
It’s called a Health Savings Account (HSA).
Ok you may be asking yourself how does a health-related account relate to my retirement strategy?
I have noticed a trend recently in talking to prospects and clients. Many of them are looking for ways to retire before 65. For several of my clients we are developing “work optional” strategies. The challenge with making an early retirement decision isn’t always about how much money you have saved for retirement, for many it is about dealing with the issues surrounding healthcare before they turn 65 and qualify for Medicare. Even if you can COBRA your health insurance for 18 months after you “retire” you may be left with a huge hole in your financial plan in the event you must tap retirement assets to cover a health event.
How does an HSA Work?
That’s where a Health Savings Account can come into play. Health Savings Accounts (HSAs) are tax-advantaged medical savings accounts available to United States taxpayers who are enrolled in a High Deductible Health Plan (HDHP). An HDHP is defined as having at least a $1,300 deductible for an individual or $2,600 deductible for a family. For 2017, an individual can save $3,400 a year pre-tax and a family can save $6,750. If you are 55 or older you can save an additional $1,000 in an HAS account. You can open an HSA account through a bank, insurance company, or other IRS approved trustee. HSA accounts differ from Flexible Spending Accounts (FSA) in that they are not a use it or lose it. You can carry over your balance from year to year. Also, if the accounts balance is over $2,000 most trustees will have options to invest your HSA very similar to your 401(k). That makes them a very attractive savings vehicle to help with healthcare related expenses which everyone will have at some point in their life. Money in your HSA will continue to grow tax-deferred until you use them at which point they will come out federally tax-free provided you use the funds for qualified medical expenses.
Also if you are strapped for cash to fund your HSA the government allow you a onetime opportunity in one tax year to roll money from an IRA into and HSA. There is a catch though. The dollars from the IRA must stay within the annual contribution limits, but if you have plenty saved in your IRA accounts this could be a potential alternative if you are short on cash to fund an HSA.
If you need help designing your retirement future or just have questions give me a call (336-310-4233) or shoot me an email at peter.huminski@lpl.com and I would be happy to help.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please consult a financial professional prior to taking any action.