This article will be of interest to those who want to accumulate significantly larger retirement funds beyond the amounts allowed by the traditional retirement accounts (IRA, 401k, 403b) on a tax-deferred basis.
Health savings accounts (HSAs) [Internal Revenue Code §223] can double as a shadow IRA without compromising your contribution limits to your other retirement accounts. Only taxpayers with high-deductible health plans (HDHP) may fund HSAs per the Internal Revenue Service rules. If your healthcare policy has a deductible between $1,300 and $6,450 for individual coverage or $2,600 to $12,900 for families in 2015, you may be eligible to open a health savings account.
An HSA lets you set aside tax-deductible money (or pre-tax money through an employer) that you can use tax-free in any year to pay your deductible and other out-of-pocket medical expenses. That’s correct; whether self-employed or an employee, you will lower your current tax burden by funding your HSA. And, there’s no use-it-or-lose-it rule, and any amount left over grows tax-deferred and can be used tax-free in the future to pay for medical expenses.
As long as you have an eligible policy, you can open an HSA whether you have coverage through your employer or on your own. In 2015, you can contribute up to $3,350 to an HSA for individual coverage or up to $6,650 for families. If you are 55 or older at any time during the year, you can add another $1,000 to these amounts. For complete information, see IRS Publication 969, Form 8889 and the Form 8889 instructions.
The basic purpose of an HSA is to salt away pre-tax income to cover medical expenses not covered by health insurance. However, as part of a current tax-saving and increased long-term retirement funding strategy, those who generously fund their HSA may find some or all of those dollars can grow in a tax-deferred investment account for many years. In the interim, your contributions can be used tax-free to pay medical expenses or premiums on long-term care insurance. Most HSA administrators provide debit cards if you want to use the money for medical expenses as needed, and some let you invest in mutual funds if you want the money to grow for future expenses (or additional retirement funding). You can compare HSA administrators’ investing options and fees at http://www.hsasearch.com.
After age 65, there’s no penalty for withdrawing money for nonmedical use; the money will be taxable, but will have benefited from years (decades) of tax deferral (not to mention each contribution-year’s immediate reduction in your tax bill). Like an IRA, the HSA is owned by the individual participant and stays with the participant even after a job change or retirement. The participant does not need to have W-2 earnings or self-employment earnings (profit) to make deductible contributions to an HSA. For example, if you are self-employed and show a loss on Schedule C for your business, you would still be eligible to make a deductible HSA contribution that year. Another key point; you do not have to itemize deductions on your tax return to get the HSA deduction, since it is taken on Form 1040, page 1, as an adjustment to income.
In the current tumult surrounding healthcare coverage and pricing, many of you may find this a comforting (and wealth-building) alternative.